AUGUST 2018

THE CARBON LOOPHOLE
IN CLIMATE POLICY
Quantifying the Embodied Carbon in Traded Products

Daniel Moran, KGM & Associates
Ali Hasanbeigi and Cecilia Springer, Global Efficiency IntelligenceAbout the Authors
KGM & Associates Pty Ltd.
KGM & Associates are economic consultants specializing in international trade analysis.
Much of their work centers around KGM’s Eora MRIO model: a high-resolution global
trade database. Eora covers the domestic economies and international trade between
187 countries (capturing >99.5% of global GDP) in high sector detail, for each year
1970-2015. Eora is used by researchers at over 800 universities worldwide. Applications
include analyzing value added in trade, inter-industry flows, international supply chains,and calculating carbon, water, and biodiversity footprints. KGM’s clients who have used
the Eora model include: McKinsey, Deloitte, Ernst & Young, KPMG, Standard & Poors, theWorld Bank, the IMF, OECD, and the United Nations. Academic papers based on the Eoramodel have been published in Nature, Nature Climate Change, and PNAS.

Global Efficiency Intelligence, LLC.
Global Efficiency Intelligence, LLC is an energy and environmental consulting and market
research firm located in San Francisco, California. We provide global market-based
solutions and in-depth technology, systems, industry, business, and policy analyses totackle the world’s energy, environmental, and climate challenges. We conduct analysis toquantify the CO2 emissions related to different industries and products and how to
mitigate them. We use systems thinking, integrative modeling, and data analytics to turndata into actionable information and to provide scientific-engineering solutions. We offer
Modeling and Analysis, Policy Design and Evaluation, Technology and Industry
Roadmapping, Market Research, and Training and Capacity Building services in thefollowing areas: Energy Efficiency; GHG Emissions Reduction; Water-Energy-Climate
Nexus; Manufacturing Resources Efficiency; Demand Response; Smart Manufacturing &Industrial IOT; Emerging Technologies; Supply Chain Carbon and Energy Footprint; andDeep Electrification and Decarbonization.

Acknowledgements
This report was made possible with the financial support of ClimateWorks
Foundation. The authors would like to thank Prodipto Roy, Helen Picot, Dan
Hamza Goodacre, and Jan Mazurek of ClimateWorks Foundation for theirsupport and valuable input to this study. We are also thankful to the reviewers
Renilde Becque, Maarten Neelis, Chris Jones, and Matthew Lewis for theirvaluable comments and inputs on the earlier version of this document.

The Carbon Loophole in Climate Policy

1

Executive Summary

The carbon loophole refers to the embodied greenhouse gas emissions
associated with production of goods that are ultimately traded acrosscountries. These emissions are a growing issue for global efforts todecarbonize the world economy. Embodied emissions in trade are notaccounted for in current greenhouse gas accounting systems.1 If theywere, many promising climate trends would be negated or reversed. For
example, many achievements of reducing emissions by developed
countries under the Kyoto Protocol would actually appear as emissions
outsourced to developing countries.
This report aims to provide a newly
updated analysis of the carbon loophole,also known as imported
consumption-based or embodied
emissions, at the global level. Using theEora global supply chain model, alongwith additional data, our analysis surveys
global trends and does a deep dive into
the countries and sectors most implicatedin the carbon loophole. This reportpresents the latest available data (sourced
from the Eora model with data year 2015,
presented for the first time in this report)
and paves the way for regular updates inanalysis of the carbon loophole in the
future.
First, we confirm earlier reports thataround one quarter of global CO2
emissions are embodied in imported
goods, thus escaping attribution in the
consuming country (the end user) andinstead being debited at the producer
side. And we clearly see that the
proportion of embodied emissions has
been growing. Since carbon intensity
varies between countries, as new climate
policies emerge, the loophole could be
widened further. The shifting of air
pollution provides a worrying example:
despite strong, successful air quality
legislation in the U.S. and EU starting in
the 1970s, global air pollution in total has
continued to grow. The carbon loophole
could permit the same to occur with GHG
emissions.

1

Many large countries – like the U.S. andChina – have a significant imbalance inimport or export of embodied emissions.
Many of the top global flows of embodied
CO2 emissions involve China, thoughflows from other countries including India
and Russia are also starting to grow.
Emissions transfers from developing andmiddle-income countries to countries withtraditionally high consumption levels likethe U.S. and EU appear to have plateauedin recent years. Whether this is a peak orjust a pause remains to be seen, and isclosely linked to global economic trends.
Finally, another emerging mega-trend is
the rise of South-South trade, or trade
among countries outside of Europe andNorth America. Embodied emissions
transfers among these countries haverisen even while transfers to North
America and Europe have stabilized.
While virtually all goods carry with themsome embodied emissions, two goods inparticular stand out as heavily traded andcarbon-intensive - also known asemissions-intensive trade-exposed (EITE)
goods: steel and cement. The report looks
closely at the embodied CO2 associatedwith the international trade of these twogoods. The steel and cement sectors
together represent over 10% of global
anthropogenic CO2 emissions. We findthat steel and clinker (a carbon-intensive
intermediate product of cement) aremostly traded across very long distances

For example, countries only report their domestic carbon dioxide emissions (also known as production-based or territorial accounting) to theIntergovernmental Panel on Climate Change.

The Carbon Loophole in Climate Policy2

outside of their region of production,
while half of the cement trade is also
extra-regional. In addition, world clinker
trade has an embodied carbon footprint
almost equal to that of cement itself.
China, while slowing down as ‘the world’s
factory’, is still by far the biggest exporterof embodied emissions in steel.
Meanwhile, embodied emissions from
India have grown rapidly, with the U.S. as
the largest recipient of embodied
emissions in Indian goods.
Better regular monitoring of trade in
embodied carbon is needed. The MRIO
models used to track embodied CO2 arestrong, but they lack institutional backing.
Building government or institutional
support for this consumption-based
accounting is the only way to ensure
regular updates, improve the accounting
standardization, and complete thetransition currently underway fromacademic project to an officiallyrecognized and supported tool.

Unless consumption-based accounting isused, countries may continue to export
their emissions to meet their Paris
Agreement targets, as occurred with the
Kyoto Protocol. Countries have reported
reductions that exceeded their Kyoto
targets, however, the changes inemissions embodied in imports arecomparable to or larger than changes indomestic emissions. Traded emissions
have undermined emissions reductions in
the Kyoto Protocol, and threaten tocontinue to do so for the Paris Agreement.
In this report, we present a current andstate-of-the-art overview tracking these
traded emissions. We also propose a way
forward for regularly updating theseresults, which can inform promising new
climate policies that close the carbon
loophole, such as California’s Buy Clean
Act, the Netherlands’ government
procurement policy, as well as efforts inthe private sector.

The Carbon Loophole in Climate Policy

3Table of Contents

About the Authors

1

Acknowledgements

1

Executive Summary

2

Table of Contents

4

1. Introduction

5

2. High-Level View of Global Traded Carbon

6

3. Deep-Dive Case Studies of Traded Carbon
3.1. Embodied Carbon in the Steel Trade3. 2. Embodied Carbon in the Cement and Clinker Trade
3.3. Country Deep-Dive: China
3.4. Country Deep-Dive: India
3.5. Country Deep-Dive: The US and UK

19
19
25
31
35
38

4. Tools using Embodied Carbon Emissions Accounts

40

5. Conclusions

44

References

46

Appendices52

Appendix 1. List of Acronyms
Appendix 2. List of Figures and Tables
Appendix 3. Data and Methods Used in this Report
Appendix 4. Additional Results Tables and Graphs
Appendix 5. State of Knowledge for Tracking Embodied Carbon

The Carbon Loophole in Climate Policy

52
52
54
56
60

4

1

Introduction

The globalized trade system entails substantial flows of goods andservices from countries of production and provision to different countriesof consumption. In many cases, and increasingly so, the majority of
production and provision is occurring in developing countries, with
developed countries acting as importers and net consumers.
Under the UNFCCC, countries report theirgreenhouse gas (GHG) emissions on thebasis of territorial emissions (also called
production-based emissions (PBA)). When
goods are traded, the emissions
associated with their production (orembodied emissions) are also traded, andthese emissions for imported goods are
not counted towards the consumer
country’s emissions reporting. Manyargue that these accounts should becorrected to account for emissions
embodied in imported goods, or
consumption-based accounting (CBA).
The term ‘embodied emissions’ refers to
the total amount of emissions from all
upstream processes required to deliver acertain product or service. Theseembodied flows of carbon, which are notaccounted for in PBA, are called
embodied emissions, emission transfers,
displacement, or are said to be fallingthrough the carbon loophole.
More local and national governments aretrying to address the issue of carbon
embodied in trade. For example, the new
Buy Clean Act in California (AB 262)
requires that certain carbon-intensive
infrastructure materials (including steel
and glass) purchased with state funds areproduced below a given threshold ofcarbon intensity. The Buy Clean
legislation helps expand the market forcompanies that have invested in
low-carbon technologies for producing
materials.
Recent studies have shown that, whenusing consumption-based accounting, theapparent progress among developed
countries in reducing their emissions is
actually negated or reversed due toimport of embodied emissions intodeveloping countries. Accordingly, muchof the increase in emissions in developing
countries can be attributed to production
for export to developed countries. It isestimated that 20-30% of global CO2
emissions are part of the carbon loophole;that is, these emissions comprise of goods
and services that are internationallytraded. Better understanding of embodied
emissions and accounting methods is
critical to informing future discussion on
decarbonizing industry. Consumptionbased accounting allows developed
countries to take responsibility for
upstream emissions that could otherwise
be ignored. However, data and research inthis area are still emerging, and have only
analyzed the carbon loophole at relatively
low-resolution in terms of countries andsectors. A detailed, up-to-date global
quantification that can inform policy isneeded.
This report aims to fill that shortcoming by
providing more up-to-date data,
information, and analysis of the embodied
carbon trade worldwide. Using the Eora
global supply chain model, we summarize
the state of embodied emissions andhighlight key trends using the latest data.
Furthermore, we have conducted several
deep-dive studies for key regions of theworld (China and India) andemissions-intensive trade exposed (EITE)
industrial sectors (steel and cement
industry) that are highly entangled in the
carbon loophole. In addition, we havepresented the state of the knowledge inthis field based on a literature review ofthe methodology for tracking embodied
carbon. We also discuss the current stateof private and public sector usage ofembodied carbon emissions accounting.
Finally, the report summarizes ourconclusions and implications for futureclimate policy.

The Carbon Loophole in Climate Policy

52High-Level View
of Global Traded Carbon

This section answers the high-level questions about embodied carbon
footprint flows between countries: Are emissions transfers growing?
Where do they come from? Where do they go? Which countries andproducts are most implicated in this trade in embedded emissions?
For this report, the Eora global trademodel was updated to include the year
2015, the most recent year for which
complete data were available. The Eoramodel details the transactions, both
domestic and foreign, linking 15,000
sectors across 189 countries using
input-output analysis, an economic
accounting method that documents thefinancial flows between sectors.
Multiregional input-output (MRIO) models
like Eora can be used to estimate
consumption-based inventories of CO2

and other greenhouse gas emissions. The
MRIO model links primary emissions
within a sector through multiple trade andtransformation steps to allocate thoseemissions to intermediate and final
consumers (final consumers effectively
refers to households but also includes
government purchases and inventory
accumulation, so that the total
consumption in a country, from all buyers,
is accounted for). In total, the model traces
more than 5 billion global supply chains ineach year. This section presents the key,high-level findings from the model output.

The Carbon Loophole in Climate Policy

6

Global CO2 Emissions (Gt CO2)

On average, one quarter of the global carbon footprint isembodied in imported goods. These hidden flows evademost types of carbon policy.
35

35%

30

30%

25

25%

20

20%

15

15%

10

10%

5

5%

Figure 2.1. Global CO2 emissions and proportion embodied in trade

0

0%
1970

1975

1980

1985

Embodied Emissions in Trade

1990

1995

2000

Non-traded Emissions

2005

2010

2015

Embodied Emissions as % of Total"Figure 2.1. Global CO2 emissions and proportion embodied in trade"
The carbon loophole is an importantfeature of global GHG emissions patterns.
A growing share of global GHG emissions
flow through the carbon loophole.
This is problematic because embodied
carbon flowing through international tradeundermines national GHG targets, unlessthey are set using consumption-based
accounting (no countries have set CBAgoals to date).
Emissions shifting manifests in several
ways: new and existing emitters canrelocate; a company can choose a
different supplier to fulfill an order; or adecrease in domestic emissions can be
more than compensated for by increased
imports. The latter can occur when an

economy shifts from an industrial base to
an information or service economy, which
increases physical imports to compensate
for declining domestic production. The
microeconomic decisions underlying
emissions shifting are complex, andenergy and pollution costs are only someof the variables, if at all, in businesses’
decision-making. These decisions will also
vary by type of industry. The embodied
CO2 used to manufacture a television ortruck can easily be emitted abroad, but it
is more difficult to relocate the GHG
emissions needed to light a home or fuel acar. Yet whatever the precise mechanics
of emissions shifting (explored by Artoand Dietzenbacher, 2012), the problem is
growing.

The Carbon Loophole in Climate Policy

7

The displacement of air pollution sets a worrying
precedent: despite strong, successful legislation in the
U.S. and EU, total global air pollution has increased.
a

Mt SO 2

100

b

c

e

Net Import

Developed countries
Net Export
Developing countries

0

Mt NO X

80

Clean AirAct

a

SophiaHelsinki Protocol CAA
1990
Protocolebc d
CLRTAP0

Gt CO 220

0

Mt ODS

1Territorial emissions
Consumption-based emissions
0

Mt
Gt
CO 2 NO x

Mt
SO 2

Total global emissions
150
100
130
100
36
23
1970

1980

1990

2000

2008

2011

Figure 2.2. Territorial and consumption-based emissions trajectories for developed anddeveloping countries, 1970-2011 (reproduced from Kanemoto et al. 2014)
Historically, air pollution regulation has
been undermined by burden shifting.
There is a risk that GHG emissions
regulation will follow this precedent. An
earlier study using Eora (Kanemoto et al.
2014) compared flows of GHGs and air
pollutants associated with traded goods
since the 1970s. For NOx and SOx
emissions, total global emissions haverisen despite a series of successful air
quality legislations in the U.S. and EU2,
formerly the largest polluters. And theshare of these emissions associated withtraded goods has also grown.

2

In contrast, for ozone-depleting
substances (ODS), the Montreal Protocolbanned both the manufacture and tradeof CFCs. As trade in ODS-containing
products was also controlled,
displacement of production was
impossible. As a result, global ODS
emissions have fallen to near zero.
To prevent further burden-shifting, major
economies must recognize that evenstrong regulation on domestic emissions
in major economies may not be effective
in reducing total global emissions due totheir imported carbon footprint.

For this analysis, the United Kingdom was included in the EU region

The Carbon Loophole in Climate Policy

8Globally, traded embodied emissions have been growing.

UK

CanadaFranceUSA

RussiaGermany

Spain

TurkeyKazakhstan

Italy

China

Iran

Japan
South Korea
Malaysia

MexicoIndia
Singapore
BrazilIndonesia

South Africa
Australia

Figure 2.3. National trends in embodied carbon trade: Net imports 1990-2015, indexed toyear 2000
For many countries and for the world economy as a whole, the share of emissions
embodied in trade peaked in 2008 and has plateaued or slightly declined since then.
There are several elements contributing to the recent plateau, including: the generalslowdown in trade following the global financial crisis; the improving carbon efficiency of
key sectors in China; and, to a limited degree, the overall decarbonization of the global
mix of traded goods. This latter factor can be attributed to a changing mix of tradedproducts (e.g. less growth in carbon intensive goods and more growth in non-intensive
goods) and to a change in the mix of countries participating in global trade, as theexports of more or less carbon intensive producers wax and wane. However, as China
shifts its economy away from heavy industry and begins to decarbonize its economy,Southeast Asia, India and Russia could become carbon-intensive manufacturing
powerhouses, which would cause a spike in embodied emissions.

The Carbon Loophole in Climate Policy

9Many large countries have a significant imbalance,
either exporting considerable embodied emissions orimporting them.
While the U.S. is the largest importer of
embodied carbon, and China the largest
exporter, many other countries are
involved in trading embodied CO2. In
Europe, Germany, the UK, France, Italy,
and Spain are significant net importers.
Asia, India, Russia, and Korea are major
net exporters. Japan, Thailand, Australia,
Turkey, and Brazil also stand out asnotable net importers of embodied CO2.

Globally, roughly one-quarter of emissions
are traded. For individual countries,
embodied carbon net imports or net
exports typically correspond to ~5-20% of
their territorial emissions. As discussed
further below, including these hidden
flows significantly changes each country’s
true progress in meeting their emissions
reduction targets.

219
63
21 19

37
11

145

40

22
35

28 11
18 8 23

70

71
13

2727

10 11

35

35

11 15

13 10

57

23

49

2

Hong Kong

10 13
1213

15 8

Balance of trade in embodied CO2
145Mt 218Mt

13 12

Exports

Imports
00 Mt

Year: 2015 Source: worldmrio.com

Figure 2.4. Map of composition of trade in embodied CO2. Blue bars show embodied imports; yellow bars
show exports. Dark blue shaded countries are predominantly importers; dark yellow are predominantly
exporters.
Table 2.4. Top importers and exporters of embodied CO2
TOP EMBODIED CO2 IMPORTERS, 2015
Rank

Country

Embodied CO2
in Imports (Gt CO2)TOP EMBODIED CO2 EXPORTERS, 2015
Rank

Country

Embodied CO2
in Exports (Gt CO2)

1

U.S.

1.452

1

China

2.186

2

China

0.706

2

USA

0.734

3

Japan

0.567

3

Russia0.625

4Germany

0.395

4

India

0.488

5

UK

0.368

5

Germany

0.355

6Hong Kong

0.349

6

Japan

0.349

7

France0.281

7South Korea

0.271

8

South Korea

0.272

8

Canada

0.186
0.164

9

India

0.233

9

Taiwan

10

Italy

0.233

10

Saudi Arabia

0.154

11

All others

4.007

11

All others

3.267

The Carbon Loophole in Climate Policy

10Many of the top global flows involve China, though thisis not the whole story.
It is important to distinguish which inter-country flows and supply chains are driving
burden-shifting.
China is a major origin and destination for embodied emissions flows. In addition to
China’s contribution to emissions shifting, several other noteworthy trends can beobserved, including:� Increases in emissions in the Russian ores and minerals sectors have been driven byhigher consumption in Europe.
� Despite considerable economic growth in Australia, India, and the Southeast Asian
countries in the past two decades, these countries do not break in to the Top 10 of
absolute largest-growing flows since 1995.
� However there is growth in south-south trade (this is discussed below).
� While Brazil and South Africa - the other BRICS countries - are significant traders ineconomics terms, they are not top players, in terms of imports or exports, ofembodied carbon trade (table 2.5.1).
The high imports of embodied CO2 into the U.S., Canada, Mexico, Japan, Korea, and coreEU nations can clearly be seen.

Figure 2.5. Top international flows of embodied carbon. Countries are colored according to CO2 emissions per
capita (yellow = highest; dark green = lowest). Values are in Kt CO2.

The Carbon Loophole in Climate Policy

11

Table 2.5.1. Top 40 global flows of embodied carbon in 2015
Rank

OriginDestination

Amount(KtCO2)

Rank

OriginDestination

Amount(KtCO2)

1

China

U.S.

502,228

21

U.S.

Japan

48,9672

China

Hong Kong

230,928

22

India

China

44,273

3

China

Japan

211,508

23

China

Italy

43,683

4

CanadaU.S.

125,674

24

Germany

U.S.

42,313

5

China

Germany

98,19925

South Korea

U.S.

40,6496South Korea

China

95,451

26

UkraineRussia38,639

7

China

UK

89,35827

RussiaGermany

38,346

8

India

U.S.

86,846

28

U.S.

UK

38,101

9

U.S.

Canada79,902

29

RussiaJapan

37,57010

ChinaSouth Korea

79,56130

China

Singapore

37,29511

MexicoU.S.

73,75031

Belarus

Russia36,191

12

Japan

U.S.

73,02632

RussiaTurkey34,944

13

Japan

China

69,778

33

China

Spain

34,672

14

U.S.

China

67,05434

China

Australia

34,322

15

RussiaChina

64,57135

China

Thailand32,150

16

China

India

61,141

36

China

Brazil31,48217

China

Canada54,89837

TaiwanU.S.

31,04318

China

France54,51738

China

Indonesia

30,03919

RussiaU.S.

53,80839

China

Russia29,81320

U.S.

Mexico52,014

40

U.S.

South Korea

28,757Since 1995, 6 of the 10 ten fastest growing country-to-country flows (in absolute volume)
have originated in China (Table 2.5.2). There has been a modest rise in American exports
to developed countries but a large rise in imports from developing countries, particularly
China and India. Increases in embodied exports from the U.S. (most substantially to
China, Mexico, the UK, Russia, Poland, and Singapore) have been smaller. The result has
been a significant net increase in embodied imports into the U.S.

The Carbon Loophole in Climate Policy

12Table 2.5.2. Top largest-growing embodied emissions flows from 1995-2015, ranked inabsolute terms and shown as percentage growth rate
OriginDestination

Growth Rate

China

U.S.

317%

China

Hong Kong

217%

South Korea

China

1431%

China

Japan

145%

China

UK

333%

India

U.S.

350%

Japan

China

594%

China

Germany

240%

China

India

874%

Russia

China

522%

The Carbon Loophole in Climate Policy

13An emerging trend is the rise of South-South trade.
The trend of emissions displacement from developed to developing countries is clear.
But there has also been a steep rise in the trade among developing nations (i.e.
“South-South” trade), with a nearly doubling of trade between these regions since 2000.
This reflects the emergence of a new phase of globalization in which some production isrelocating from China to other countries, particularly production of raw materials andintermediate goods such as mining and chemical products.
Import Sources

4

4

3

3

Gt CO2Gt CO2

Export Destinations

2

1

0

2

1

1995

2000

2005

From South to Other

2010

2015

0

To South

1995

2000
From Other

2005

2010

2015

To SouthFigure 2.6. Export destinations from the South (ie. non-OECD countries) and import sources (Gt CO2). The
recent rise of trade among Southern countries is clearly visible.
The growth of CO2 emissions embodied in
Chinese exports has slowed in recent
years, while the embodied emissions
exported from regions including
Bangladesh and Vietnam have surged.
Ever more complex supply chains are
distributing energy-intensive industries
across the global South. In order for theParis Agreement goals to be tenable,

these growing hidden emissions flows
between developing countries must be
accounted for in carbon policy.
The rise in South-South trade has been
explored in more depth in recent articles
by Mi and colleagues (Mi et al. 2017) andby Meng and colleagues (Meng et al.
2018).

The Carbon Loophole in Climate Policy

14

Carbon efficiency varies considerably between countries.
This means that as national carbon policies come into
effect, it is likely that the loophole will grow more.

Figure 2.7. Same-sector carbon intensity (kg CO2 emissions per $US1 of production) (dot = country)

The Carbon Loophole in Climate Policy

15

The carbon efficiency of production for
specific product and service groups varies
widely across sectors and acrosscountries. As seen in this figure, the same
sector in different countries can have an
over 10-fold difference in carbon
efficiency, i.e. the carbon emissions
required to produce one unit of economic
output. These differences are to an extent
due to aggregation in the economic
classification used: e.g. the chemicals
sector in one country may specialize inmore value-added products while thechemicals sector in another country isbuilt around more primary products. Thus,
to a degree, intra-sectoral differences
make international comparison of sectors
difficult.
With that caveat in mind, the wide
differences in carbon intensity3 mean thatas more stringent carbon regulation
comes into effect, there will be both anopportunity and an economic incentive to
avoid regulation. While it is true that3

carbon costs are a small portion of thetotal cost structure for most industries,
nevertheless as the costs of emitting
carbon rise in certain countries and areleft unaccounted for in others, it can be
expected that businesses make decisions
about production and sourcing as thosecosts rise at the margin.
Green purchasing policies circumvent thispotential problem of production fleeing
regulation, as they create a level playing
field for all who want to sell to the
procuring party, which sets a carbon
benchmark or maximum carbon threshold.
As long as producers meet this specified
standard of carbon intensity for theirproducts, buyers need not be discerning
about the carbon policy regime in which a
producer is operating. Examples of suchpolicies include the California Buy Clean
Act and low-carbon procurement
requirements in the Netherlands, as wellas commitments on the part of individual
private companies.

The main reasons for different carbon intensity are different energy systems and electricity production technologies in use, differences in thetechnologies in use in the industry, and differences in specialization within the sector.

The Carbon Loophole in Climate Policy

16

For top importers (the U.S., UK, and EU), net imports havestabilized in recent years.
1.5

Gt CO2

1.0

0.5

0.0

-0.5

1995

2000
USA

2005
UK

EU

2010

2015

Japan

Figure 2.8. Net imports of CO2 emissions (Gt CO2) for the U.S., UK, Japan, and EU (other than UK), haveplateaued in recent years.
The rapid growth in imports of embodied
emissions in the top net importers (U.S.,
the UK, Japan, and the EU) has slowed
and stabilized in recent years. The global
economic slowdown around 2008 playeda major role in this stabilization.
Additionally, the growth in global CO2
emissions from fossil fuels and industry
has also slowed, despite continued
economic growth.

According to an analysis by Jackson andcolleagues (Jackson et al 2015),
decreased coal use in China was largely
responsible, coupled with slower global
growth in petroleum and faster growth inrenewables. However, additional action isstill needed, as production shifts out ofChina and to other countries that will besusceptible to the carbon loophole.

The Carbon Loophole in Climate Policy

17

Better regular monitoring of trade in embodied carbon
is needed.
Although the total volume of emissions
embodied in trade has in recent years
plateaued, there is no indication that the
carbon loophole is shrinking; if anything,all indications are that heterogeneous
climate policies risk intensifying carbon
leakage as production continues to shift
to lesser-regulated regimes. Therefore, it
is important to track the trend ofembodied carbon flows over time.
Measurement is the first step towards
management, and data collection canenable informed policy decisions.
Monitoring can allow the establishment ofa baseline from which to assess whether
introduced policies are benefiting or
undermining a country’s
consumption-based carbon profile.
There are several MRIO databases
available for monitoring embodied CO2
emissions. These databases each havestrengths and limitations. These pros andcons are discussed below in the
Appendix, and in the Climate Works
report “Imported carbon emissions
through consumption – the case ofEurope”. This study was built using theEora MRIO database. Eora was chosen as
it offers the most recent timeseries and4

most comprehensive coverage ofcountries, and a high level of detail.
Official endorsement ofconsumption-based accounting has beenslow to develop. The UK is the only
country that annually calculates anddiscloses a consumption-based emissions
account, and France does sosemi-annually. The statistics bureaus in
Sweden (through the PRINCE project) andthe Netherlands4 have also expressedinterest. In 2017 the OECD released aseries of official input-output tables (theOECD Inter-Country Input-Output
Database, or ICIO) for the OECD member
nations, and calculated the embodied
carbon footprint flows between member
nations and key trade partners.
Stronger institutional support from official
statistical offices would improve thetracking of embodied carbon flows. In
addition to improved IO and trade
statistics, a key area where further
improvement is needed is the sectoral
emissions inventories. Current inventories
tend to be broad, and often do not
pinpoint in adequate detail which
industries are associated with whichprimary emissions.

Hoekstra and Edens (Hoekstra et al. 2013, Edens et al. 2015) have presented the Simplified National-Account Consistent (SNAC) method for
combining an official national IO table with a global MRIO.

The Carbon Loophole in Climate Policy

18

03

Deep-Dive Case Studies
of Traded Carbon

We chose two countries and two industrial sectors for deep-dive casestudies. For the industrial sectors, we analyze two of the most energyand carbon-intensive sectors: steel and cement. Each of these sectors
accounts for over 5% of current anthropogenic CO2 emissions worldwide.
In addition, these energy-intensive commodities are traded at asignificant level internationally, making them EITE (emissions intensive
trade exposed) sectors.
For country-level case studies, we analyze China and India, which together account for
about 30% of the world's embodied emissions in exports, are growing rapidly, and importand export a significant amount of goods.

3.1. Embodied Carbon in the Steel Trade
Steel is a highly CO2-intensive product that is also traded globally in significant amounts.
Steel production is very CO2-intensive due to the emissions from combustion of fuels forheat, and indirect emissions from high consumption of electricity (primarily in electric arc
furnaces and finishing operations). Commodity steel refers to steel that is produced andtraded directly, not steel-containing products. According to the Steel Statistical Yearbook
by Worldsteel (2017), China exported 112 million tons of commodity steel in 2015, which is
1.4 times the total steel production in the U.S. in that year - although the U.S. itself is the
4th largest steel producer in the world. The significant global trade of such a carbonintensive commodity has substantial implications for the carbon loophole.

The Carbon Loophole in Climate Policy

19

There are significant extra-regional flows of carbon
embodied in the commodity steel trade worldwide.

13660

60

321

11550

17940

14740

60
194

9170

UNITED STATES OF AMERICAHONDURASSUDAN
GUINEA
PA

E

00

32

15

18360

10

224

14

11

0

0

4447

14230
ERIT

TOGO

CÔTE GHANA

BENIN

A D’IVOIRE

10090

European Union
Other Europe
Commonwealth of Independent States (CIS)
North America (NAFTA)
Central and South America

15160

AUSTRALIA

AfricaMiddle East
China
Japan
Other Asia
Oceania

Figure 3.1.1. Top 15 extra-regional flows of CO2 emissions related to the international trade of commodity
steel in 2016 (kt CO2)
Figure 3.1.1. shows the embodied carbon in commodity steel trade worldwide. Around
67% of the embodied carbon in commodity steel trade is extra-regional (between
different global regions, highlighted in the figure), while the remainder is traded withineach region. China is the largest net exporter and the region ‘Other Asia ’ is the largest
net importer of the embodied carbon in commodity steel trade. The top three largest
flows of embodied carbon in the commodity steel trade are from China to Other Asia,
Japan to Other Asia, and The Commonwealth of Independent States (CIS) to the EU 28
region.

The Carbon Loophole in Climate Policy

20

Except for China, Japan, and the Commonwealth of
Independent States (CIS), all regions of the world are net
importers of carbon emissions embodied in commodity steel.
25000020000015000010000050000
0(50000)(100000)

China

CIS

Japan

Oceania

Central &South
America(150000)

Other
EuropeNorth
EropeanAmerica
Union (28)(NAFTA)

Africa &Middle East

(200000)
Other Asia

(250000)
Extra-regional Exports

Extra-regional Imports

Figure 3.1.2. World trade of carbon embodied in commodity steel by region (kton CO2) in 2016
Figure 3.1.2. shows the carbon embodied in commodity steel extra-regional export andimport for each region separately. Only China, Japan, and CIS are net exporters of
embodied carbon in steel trade, while the other regions are net importers of carbon
embodied in commodity steel trade. ‘Other Asia’, Africa, and the Middle East are thelargest net importers of carbon embodied in the commodity steel trade. Since countries
in these regions are still developing, they have high growth potential and it is likely thatthey will continue to be large net importers of embodied carbon from the steel industry.

The Carbon Loophole in Climate Policy

21

China produces over one quarter of traded carbon
embodied in commodity steel.
India
BrazilBelgium
UkraineGermany
European Union (28)South Korea
Russia
Japan
China

0

50000

100000150000200000250000Figure 3.1.3. Embodied carbon of top 10 major exporter countries of commodity steel in 2016 (kton CO2)
Figure 3.1.3. shows the top 10 exporter
countries for embodied carbon in thesteel trade. China alone accounts for 27%
of total export of embodied carbon incommodity steel trade. Other top
embodied carbon-exporting countries forcommodity steel are Japan, Russia andSouth Korea. China’s domestic steel
demand has peaked, yet 80% of its steel
production capacity is less than 15 years
old. Therefore, it is likely that China will
look to increase its steel export in the
coming years, potentially shifting toexport of more value-added steel
products instead of commodity steel andfacilitating increased demand for steel
products in countries connected to its
One Belt One Road initiative.

It should be noted that China has
implemented aggressive policies toreduce the energy intensity and CO2
emissions in its steel industry since 2006
by implementation of energy efficiency
programs and shutting down old
inefficient steel plants. Despite these
efforts, the CO2 intensity of steel
production in China is still significantly
higher than many other countries mainly
because of the fact that more than 90% of
the steel in China is produced using theenergy-intensive Blast Furnace-Basic
Oxygen Furnace process as opposed to
the Electric Arc Furnace process that uses
significantly less energy and primarily
uses steel scrap. In addition, coal is theprimary fuel used in the Chinese steel
industry. Figure 3.1.4 shows Chinese steel
production and its share in total world
production in 1990-2015.

The Carbon Loophole in Climate Policy

22Sources: EBCISIY, various years; NBS 2015a; Worldsteel Association 2016

Figure 3.1.4. China’s crude steel production and share of global production (1990–2015)

The Carbon Loophole in Climate Policy
The Carbon Loophole in Climate Policy

16
23

The trade in steel-containing goods made up 21% of steel
use and 77% of commodity steel exports in 2013,
accounting for a significant share of embodied carbon flow.
Rest of The World
Spain
FranceMexicoItaly
PolandUSA
South Korea
Japan
Germany
China

0

50000

100000150000200000Figure 3.1.5. Embodied carbon in exported value-added steel products for top 10 countries in 2013 (kton CO2)
The embodied carbon in commodity steel
covers only about half the picture ofcarbon flow in the steel trade. The otherhalf consists of embodied carbon in the
trade of steel-containing goods(value-added steel products). The top 10
countries listed in Figure 3.1.5. account for
about 70% of the total export ofvalue-added steel. Figure 3.1.5. shows theembodied carbon in value-added steel
export for each country and the rest of theworld. China alone accounted for over aquarter of the world’s embodied carbon inexported value-added steel products. As
the Chinese economy matures anddemand for infrastructure and building
construction decreases, China will
increasingly shift from commodity export
to value-added products export. Thus,
China’s export of embodied carbon invalue-added steel products is likely toincrease in the coming years.
Also, as can be seen from this graph andTable A.4.3 in the Appendix section, manyof the countries ranked high for embodied
carbon in exported value-added steel
products in Figure 3.1.6 are among the top
importers of commodity steel as shown in
Table A.4.3. In other words, they importsignificant amounts of commodity steel
that has high embodied carbon andproduce high value added steel andexport a substantial portion of it. These
countries gain more economic benefits
from value-added steel trade without
being held accountable for the high CO2emissions that occur during commodity
steel production.

The Carbon Loophole in Climate Policy

24

3.2. Embodied Carbon in the Cement and Clinker Trade
Cement is a highly CO2-intensive product that is also traded globally in significant
quantities. The production of one ton of cement releases about 0.6 – 1.0 ton of CO2
depending on the clinker-to-cement ratio, fuel mix, and other factors. The dominant
driver of CO2 emissions in cement manufacture is from calcination to produce clinker, inwhich limestone (CaCO3) is transformed into lime (CaO) and byproduct CO2. The rest of
the CO2 emitted during cement manufacture is the result of burning fuel to provide theheat for calcination, electricity use, and quarry mining and transport. Clinker is anintermediary product in the cement production process that is also traded globally.
According to the U.S. Geological Survey (2016), China alone exported about 15 million
tons of cement in 2015, or 18% of the total cement production in the U.S. in that year. The
trade of cement and clinker worldwide has significant implications for the embodied
carbon in global trade.

The Carbon Loophole in Climate Policy

25

There are large extra-regional flows of carbon embodied
in the cement trade worldwide.

743

00
13

1980

1416

848

541

720
2845
1767

589

5

225

07

326

26

508

4590

471

0

507

11

3162

Mexico

14

India

920

USA
Commonwealth of Independent States (CIS)
CanadaNorth America (NAFTA)
European Union
Central and South America
Other Europe
AfricaMiddle East
China
Japan
Other Asia
Oceania

Figure 3.2.1. The main extra-regional flows of CO2 emissions relating to the international cement trade in 2014
Figure 3.2.1. illustrates the embodied
carbon in the cement trade worldwide.
Around 50% of the embodied carbon in
the cement trade is extra-regional(between different global regions,highlighted in the figure), while theremainder is traded within each region.
The ‘Other Asia ’ region is the largest net
exporter and Africa is the largest net
importer of the embodied carbon in the
cement trade. The top three largest flowsof embodied carbon in the cement tradeare from the EU, China, and Other Asia
regions to Africa.
China accounts for about half of thecement production in the world. Similar towhat has been discussed for the steel
industry in the previous section, China has
implemented aggressive policies to6

reduce the energy intensity and CO2
emissions in its cement industry since2006 by implementation of energy
efficiency programs and shutting down
old inefficient cement plants. China used
to have large cement production capacityfrom inefficient vertical shaft kilns. Overthe past decade, Chinese government
aggressively pushed for closing down ofthese outdated plants and replacing themwith efficient rotary kilns. By 2015, lessthan 6% of the cement production
capacity in China was using vertical shaft
kilns. As a result of this action, the energy
intensity and CO2 emissions intensity of
cement production in China dropped
significantly over the past decade. Figure
3.2.2 shows cement production in China
by kiln type during 1990-2015.

Other Asia region includes countries in Asia continent except India, China, Japan, and countries in Middle East and Commonwealth of
Independent States (CIS) region which are separately identified in the map and in this analysis. It should be noted that unlike in steel trade
analysis, India is not included in Other Asia region because different sources of data were used for the cement and steel trade.

The Carbon Loophole in Climate Policy

26

Sources: ITIBMIC 2004; MIIT 2011; NBS 2015.

Figure 3.2.2. Cement production in China by kiln type, 1990–2015

The Carbon Loophole in Climate Policy

27

The embodied carbon in extra-regional clinker tradeworldwide is almost equal to the embodied carbon in
cement trade.

535

Clinker is an intermediary product in the cement production process. Due to process
emissions and combustion of fuel for heat, over 95% of the CO2 emitted in producing
cement is emitted from calcination for clinker production. To reduce shipment costs,
clinker is often traded instead of cement. In the destination country, the clinker is groundwith some additives to produce cement.

806

682

19

45

6054

UNITED STATES OF AMERICA

4089

1851

1264

999

HONDURAS

CÔTE GHANA

BENIN

A D’IVOIRE

3

2089

USA

1403

E

PA

56

Mexico

TOGO

1022

India

GUINEA

Commonwealth of Independent States (CIS)
CanadaNorth America (NAFTA)

572
AUSTRALIA

European Union
Central and South America
Other Europe
Africa2321

Middle East
China
Japan
Other Asia
Oceania

Figure 3.2.3. The main extra-regional flows of CO2 emissions associated with international
clinker trade in 2014
Figure 3.2.3. illustrates the embodied carbon in the clinker trade worldwide. Around 60%of the embodied carbon in the clinker trade is extra-regional (between different global
regions, highlighted in the figure) while the remainder is traded within each region. The
EU28 region is the largest net exporter and Africa is the largest net importer of theembodied carbon in the clinker trade. The top three largest flows of embodied carbon in
the clinker trade are from the EU and the Middle East to Africa, and from Other Asia toCentral and South America.

The Carbon Loophole in Climate Policy

28

Africa is by far the largest regional net importer of carbon
embodied in cement, followed by Asia and the U.S.
15000

10000

5000

0
EU
(5000)
Other
Asia

Japan

China
MiddleEast

India Mexico Oceania

CanadaCIS

USA

Other Central
Europe & SouthAmerica(10000)Africa(15000)Extra-regional Exports

Extra-regional Imports

Figure 3.2.4. World trade of carbon embodied in cement by region in 2014 (kton CO2)
China, the EU 28 and Other Asia are the top three net exporters of embodied carbon in
the cement trade, while Africa, the U.S., and the Central and South America regions are
the top three largest net importers. Since many countries in Africa and Central and SouthAmerica are rapidly developing, demand for cement for infrastructure and building
construction will likely surge. These regions will likely continue to be large net importersof embodied carbon in cement unless they increase their own domestic cement
production capacity. This would require new plants, which could use best available
technologies and have lower emissions.

The Carbon Loophole in Climate Policy

29

Africa is also by far the largest regional net importer ofcarbon embodied in clinker, followed by Central andSouth America and Oceania.
AfricaCentral & South America
Oceania
Other Europe
CIS
USA
CanadaMexico
China
India
Japan
Middle East
Other Asia
EU
(15000)(10000)(5000)
Extra-regional Exports

0

5000

10000

15000

Extra-regional Imports

Figure 3.2.5. World trade of carbon embodied in clinker by region in 2014 (kton CO2)
The patterns for embodied carbon in the clinker trade are somewhat different from thecarbon in the cement trade shown on the previous page. The EU 28, Middle East, andJapan are the top three net exporters of embodied carbon in the clinker trade, while
Africa, Central and South America, and Oceania are the top three largest net importers.

The Carbon Loophole in Climate Policy30

3.3. Country Deep-Dive: China
China grew enormously as the “world’s
factory” from the 1990s onward. In theearly 1990s, most of China’s trade wasregional, but over the following two
decades, especially after joining the World
Trade Organization in 2001 China becamea key node in the global economy. China
remains a major trader of embodied CO2,
with imports equal to 20% of its territorial
emissions and net exports equal to 13% of
territorial emissions (Table 3.3.1).

The eclipsing of Western manufacturingby Chinese manufacturing, combined withthe relative carbon intensity of theChinese energy system, means that China
has been a prime actor in the rise ofcarbon leakage and emissions
displacement. Much of the apparent
emissions reductions occurring in North
America and Europe has actually been ashifting of emissions from these countries
into China. While this emissions
displacement dynamic emerged strongly
between 1990 and 2010 (Figure 3.3.1.),
since 2010, the phase of fast growth has
ended, and the growth rate in carbon
embodied in exports has slowed.

Table 3.3.1. China’s embodied carbon balance of trade (Unit: KtCO2; Year: 2015)
Territorial emissions from fuel combustion

10,641,789

Embodied in imports

706,053

Embodied in exports

2,186,624

Embodied in net imports:-1,480,571

Consumption-based account:

9,161,218

The Carbon Loophole in Climate Policy

31

Figure 3.3.1. China’s territorial and consumption-based emissions. Note: The gap between
territorial and consumption-based emissions is the net export of embodied CO2.

Figure 3.3.2. Chinese import and export volumes in monetary terms, 2005-2016 (Setser 2016)
In China, exports have leveled off in monetary terms, and emissions started to plateau
after 2012. This stabilization in emissions is in part due to major policies and programs to
improve energy efficiency, shut down old inefficient plants, and shift away from coal.
China officially aims to peak its CO2 emissions by 2030.

The Carbon Loophole in Climate Policy32

A large percentage of emissions from many sectors in
China are associated with demand for exports, especiallyfor textiles, toys and recreational products.
For at least 10 sectors (of 123 sectors defined by the Chinese sectoral classification usedin the Eora model), more than one third of the sector’s Scope 3 emissions are emitted inservice of export production (Table 3.3.2). Key sectors in which production for export
drives sectoral emissions are toys and recreational products; leather, textiles, andapparel sectors; and office equipment and “other manufacturing products”. Emissionsintensive sectors in China like steel and cement represent a larger absolute amount ofemissions traded internationally, but the sectors discussed here are more exposed to thecarbon loophole due to their orientation towards export.
Table 3.3.2. Top 10 sectors by share of sectoral emissions induced by foreign final demand
SectorShare of emissions inducedby foreign final demand

Toys, athletic and recreation products

65%

Other textiles (not elsewhere classified

52%

Leather, furs, down48%

Apparel

43%

Cultural goods

42%

Woolen textiles

37%

Instruments & measuring equip

37%

Cultural and office equipment

37%

Knitted fabrics

37%

Other manufacturing products

34%

The Carbon Loophole in Climate Policy

33

China’s embodied carbon still flows to many of its historic
trade partners, but India, Indonesia, and Malaysia are
rapidly becoming major importers of embodied carbon
from China.
China is a major trading nation and has
significant trade relationships with many
countries following its entry into the WTO
in 2002 (Table 3.4.5). Of the export
destinations of embodied carbon from
China, the standard set of countries areseen (U.S., European countries, Japan,
Korea). A noteworthy item is the rapid riseof India: in 1995 it was only the 19thlargest importer of embodied CO2 from
China, but in 2015 it was 7th. The change
in suppliers is also significant, with India,

Indonesia, and Malaysia not ranking in the
top 10 suppliers in 1995 (they were 10th,
13th, and 19th, respectively) but rising to
5th, 7th, and 8th in the ranking in 2015.
China is a net exporter of embodied
carbon - volumes of embodied CO2
imports into China are in total 50% lower
than its exports. Korea, Russia, Indonesia,
Malaysia, and Kazakhstan stand out as
noteworthy suppliers of embodied CO2
into the Chinese economy.

Table 3.3.3. China’s trade partners, by import and export of embodied CO2 (Unit: kt CO2; Year: 2015)

Consumer

EXPORTS

IMPORTS

Total emissions
exported to thiscountry

Total embodied
emissionsoriginatingin this country

Rank in Rank in
2015
1995

OriginCountry

Rank in Rank in
2015
1995

U.S.

502,2281

1South Korea

95,451

1

4

Hong Kong

230,927

2

3

Japan

69,777

2

3

Japan

211,508

3

2

U.S.

67,054

3

1

Germany

98,1994

4

Russia64,5704

2

UK

89,358

5

6

India

44,272

5

10South Korea

79,561

6

5

Germany

27,992

6

5

India

61,141

7

19

Indonesia

19,946

7

13

Canada54,897

8

9

Malaysia

19,827

8

19

France54,5169

7

Australia

18,694

9

8

Italy

43,68310

8

Kazakhstan

16,144

10

7

The Carbon Loophole in Climate Policy

34

3.4. Country Deep-Dive: India
India’s CO2 emissions doubled between 2002 and 2015. The country is increasingly a net
exporter of embodied CO2: in 2015, almost 20% of its emissions were associated withproduction for export. India’s balance of trade in embodied emissions in 2015 was asfollows:
Table 3.4.1. India’s embodied carbon balance of trade (Unit: KtCO2; Year: 2015)
Territorial emissions from fuel combustion

2,454,968

Embodied in imports

232,722

Embodied in exports

488,312

Embodied in net imports:-255,590

Consumption-based account:

2,199,378

While India has been a net exporter of embodied carbon since the mid 1990s, the growthof embodied emissions exports has accelerated since 2010. Around 2012, total
emissions began to grow faster than consumption-based emissions.

Figure 3.4.1. India’s territorial and consumption-based emissions

The Carbon Loophole in Climate Policy

35

For some industry subsectors in India, a high percentage
of sectoral emissions are associated with production
for export
For a number of economically important sectors, including leather and textiles, tea, andelectrical appliances, up to 30-50% of the sector’s full supply chain emissions (Scope 3
emissions) are attributable to production for export. Compared to more emissionsintensive sectors such as steel and cement, these sectors may be responsible for lessabsolute emissions in exports; however, due to their trade exposure, they represent an
opportunity for downstream consumers to close the carbon loophole by demanding
lower carbon forms of a given good.
Table 3.4.2. Top sectors in India, by share of sectoral emissions attributable to production for export (year: 2015)
SectorShare of emissions inducedby foreign final demand

Leather footwear

55%

Leather and leather products

49%

Khadi, cotton textiles (handlooms)

44%

Industrial machinery

42%

Motorcycles and scooters

36%

Bicycles, cycle-rickshaw

34%

Electrical appliances

33%

Tea

31%

Coconut farming and processing

30%

Organic heavy chemicals

29%

The Carbon Loophole in Climate Policy

36

The U.S. is the largest importer of embodied carbon
from India.
The U.S. is the largest recipient of
embodied emissions from Indian goods,
importing more than twice as much as thenext largest export destination, China.
The other top destinations for embodied
carbon in Indian exports are the European
economies of Germany, France, and Italy,
and regional trading partners of Saudi
Arabia, the UAE, and Bangladesh. Japanis the fifth largest emissions import andexport destination and export destination.

India imports little embodied carbon from
European countries, with Russia, South
Korea, South Africa, Australia andMalaysia as top importers into India. The
only European country that exports alarge amount of embodied carbon to India
is Germany, which is the 8th largest
source of embodied carbon in imports
into India.

Table 3.4.3. India’s trade partners, by import and export of embodied CO2 (Unit: kt CO2; Year: 2015)

Consumer

EXPORTS

IMPORTS

Total emissions
exported to thiscountry

Total embodied
emissionsoriginatingin this country

Rank in Rank in
2015
1995

OriginCountry

Rank in Rank in
2015
1995

U.S.

86,845

1

1

China

61,141

1

2

China

44,272

2

11

Saudi Arabia

21,6212

4

UAE28,583

3

5

U.S.

18,4583

1

UK

23,0084

4

Russia15,526

4

3

Germany

21,607

5

2

Japan

9,863

5

5

Japan

17,514

6

3

South Korea

8,592

6

11

Saudi Arabia

14,20079South Africa

8,094

7

9

France12,315

8

6

Germany

7,407

8

7

Italy

11,4199

7Australia

6,519

9

10

Bangladesh

9,692

10

21

Malaysia

5,072

10

21

The Carbon Loophole in Climate Policy

37

3.5. Country Deep-Dive: The US and UK
Overall, developed countries are net
importers of embodied carbon. The US
and UK follow this pattern. But there aresome interesting aspects of the trend inthese important economies.
In the US, embodied imports accelerated
rapidly starting in the early 1990s, but
declined very sharply with the 2007
global financial crisis. Both directemissions within the US (territorial
emissions) and embodied emissions haveroughly plateaued since the financial
crisis. It is too soon to say whether this isthe beginning of a lastingde-carbonization trend or only amomentary lull.

The UK's territorial CO2 emissions havebeen declining for decades, and it has
been one of the few countries able toreport a decline in absolute emissions.
However, considering the embodied
carbon in imports, this apparent successis partly reversed. The total carbon
footprint, inclusive of embodied CO2 in
imports, has slightly increased since 1990.
As in the US, embodied CO2 imports werestrongly affected by the global financial
crisis and have continued to declined
slightly even after crash shock.

Figure 3.5.1. Territorial and consumption-based emissions in the U.S. and UK

The Carbon Loophole in Climate Policy

38

The Carbon Loophole in Climate Policy

39

4

Tools using Embodied
Carbon Emissions Accounts

Consumption-based emissions accounting can inform policymaking thataims to close the carbon loophole. Many of these policy tools are notentirely new, but to effectively address imported carbon they may requirea specific focus on these emissions, therewith building on or expanding
existing or emerging policies.
We examine applications of embodied emissions accounting by dividing policy
interventions along broad phases of the supply chain: production, the intermediate
supply chain, and consumption. Policies listed under Production include those that
regulate within national borders, while intermediate products may be traded acrossborders. Consumption policies address consumption by households, government,
businesses, and other actors. A selection of policies is summarized in Table 4.6.1 andbriefly further elaborated on in the sections below.

Table 4.6.1. CBA Policy applications by product lifecycle phase
PRODUCTION
Production

Intermediate Supply Chain

Consumption

� Point-source andindustry-level regulations
� Product location at sale
� National emissions targets
� New metrics for emissions
accounting� Border tax adjustments� Technology transfer policies(offsets)
� Best Available Technology
standards
� Voluntary agreements bytrade associations

� Policies targeting householdbehaviors
� Government and businessprocurement
� Retailer certifications andproduct choice� Information, ranking, andaward campaigns

The Carbon Loophole in Climate Policy

40

Production Policies and Applications
Production policies aim to address
mitigation within national borders.
Mitigation policies at the national leveland below should be carefully designed tominimize leakage (either through shifting
domestic production to carbon-intensive
imports or through long-term relocation of
production to unregulated regions outside
national borders). Carbon pricing can be
designed to reduce leakage. Under anemissions trading system, there is atradeoff between providing industries withfree emissions allowances in order toprevent carbon leakage, and achieving
the emissions reductions goals of the ETS.
Other studies recommend adjusting
consumption-based accounting for carbon
pricing to better incorporate trade balanceand specialization (Jakob and Marschinski2013).
The ClimateWorks report “Europe’s
Carbon Loophole” (Becque et al. 2018)provides greater elaboration on potential
key policy actions.

National emissions reduction policies canbe guided by consumption-based
accounting, including the inventories inthe studies covered previously as well as
new metrics such as technology-adjusted
consumption-based accounting (TCBA),
which adjusts for the carbon intensity ofexport sectors around the world (Kander
et al. 2015). Simply increasing
consumption-based accounting can also
help countries determine their role in the
carbon loophole, as well as identifying key
sectors and geographies that drive
carbon leakage (Minx et al. 2009). At
present, fuel and GHG suppliers in
California and some parts of the UnitedStates as well as several companies inFrance are the only firms subject tomandatory reporting of indirect andembodied emissions. A number ofcountries provide voluntary, governmentinitiated reporting on their embodied
emissions, mostly through MRIO analysis,
such as the UK, France, Sweden, andDenmark. Mandatory sustainability
reporting for businesses and countries
can help increase awareness and use of
CBA approaches to GHG management.

The Carbon Loophole in Climate Policy

41Intermediate Supply Chain Policies and Applications
Intermediate supply chain policies aim toaddress products that are traded acrossborders. CBA can be used to close thecarbon loophole between developed anddeveloping countries through financialtransfers to developing countries foremissions reduction projects (a.k.a.
offsets). Some studies have shown that
offsets are a cost-effective mechanism forreducing carbon leakage (Springmann2014). There are many offset programsaround the world, such as the Clean
Development Mechanism and REDD+.
Border tax adjustments (BTAs) are anothercommonly discussed policy for closing thecarbon loophole at national borders. BTAs
would essentially tax imported products
based on their carbon intensity. To date,no country has implemented BTAs
(possibly out of concern for violation of
WTO trade rules), but the EU has
discussed taxing import ofenergy-intensive goods as part of theemissions trading system reform, andcarbon BTAs were considered in the past.
Given that BTAs can put exporting
countries at a disadvantage, some studies
have recommended that BTAs be
combined with revenue redistribution to
the exporting countries and technology
transfer deals (K. Steininger et al. 2014).
Another main example of interventions inthe supply chain is voluntary sustainable
trade programs, which mostly address
agricultural and forestry products whose
production has been associated with
deforestation (and therefore carbon
emissions) in developing countries.
Examples include commodity-specificroundtables, such as the Roundtable on
Sustainable Palm Oil or the Roundtable on
Sustainable Beef, which engage industry
stakeholders and provide standards for
production. There are also numerous
certification schemes for products, suchas the Fair Trade label.

The Carbon Loophole in Climate Policy

42Consumption Policies and Applications
Consumption policies aim to address end
use of products by households,
government, businesses, and otheractors. Many countries have policies
and/or programs in place that indirectly
address embodied carbon of imported
goods by reducing consumption ofcarbon-intensive products. Sustainableprocurement programs set standards forgoods consumed by a given institution,
often government agencies or individual
businesses. These procurement
guidelines can be voluntary or mandatory.
For example, in Denmark, the central
government is required to procuresustainable timber for their buildings,
furniture, and paper products. There isalso a voluntary Green Public
Procurement initiative organized by theEuropean Commission for governments inthe EU to implement as they desire. The
Buy Clean Act in California requires stateagencies to consider the embodied
emissions in steel, glass, and otherbuilding materials when contracting forstate-funded infrastructure projects. While
non-mandatory, many behavioral policies
and labeling campaigns target household
consumers, encouraging them to makeenvironmentally responsible purchasing
and consumption choices.
Going forward, countries should increaseawareness of the carbon loophole and theneed to address these emissions.
Following acknowledgment, policymakers
can adopt a consumption-based
accounting framework to begin toannually measure and report theirembodied emissions footprint. Finally,
countries can adopt policies that target
production, the intermediate supply chain,and consumption as discussed above.

The Carbon Loophole in Climate Policy

435Conclusions

This report has provided up-to-date data, information, and analysis of theembodied carbon trade worldwide. Using the Eora model, we havesummarized the state of embodied emissions and highlighted key trends
using the latest data. Furthermore, we have conducted several deep-divestudies for key regions of the world (China and India) and industrial
sectors (steel and cement industry) that are highly entangled in the
carbon loophole.
Around one quarter of global CO2
emissions are embodied in imported
goods, thus escaping traditional climate
regulations. This proportion has been
growing over time. Since carbon intensity
varies between countries and sectors, as
new climate policies emerge, the loophole
could be widened further. This has
already occurred with air pollution:
despite strong, successful air quality
legislation in the US and EU starting in the
1970s, global air pollution in total has
continued to grow. The carbon loophole
could allow the same to occur with GHG
emissions.
Many large countries have a significant
imbalance in import or export ofembodied emissions. Emissions transfersfrom developing countries to the U.S. andEU appear to have plateaued in recent
years, but whether this is a peak or just a
pause remains to be seen. Instead, growthin the trade of embodied carbon is mostly
occurring through South-South transfers,
or trade among countries outside ofEurope and North America. Embodied
emissions transfers among thesecountries have risen even while transfers
to North America and Europe havestabilized.
Our sectoral deep-dive studies showedthat there are significant inter-regional andextra-regional flows of carbon embodiedin commodity steel, value-added steel,cement, and clinker trade worldwide.
China is the largest net exporter of
embodied carbon in commodity steel tooutside of Asia. China accounts for 40% of
the carbon embodied in global commodity

steel extra-regional trade and 27% ofcarbon embodied in the overallcommodity steel trade. Except for China,
Japan, and The Commonwealth of
Independent States (CIS), other regions of
the world are net importers of carbon
embodied in commodity steel. The
embodied carbon of traded steel isdivided almost evenly between
commodity steel and steel-containing
goods.
Cement and clinker are also traded far
outside of their regions of production around 50% and 60% of the embodied
carbon in the cement and clinker trade isextra-regional, respectively. Given its
rapid development, Africa is the largest
net importer of embodied carbon in bothcement and clinker. The top three largest
flows of embodied carbon in the cement
trade are from the EU, China, and Other
Asia regions to Africa. The EU28 region is
the largest net exporter (31% of total) and
Africa is the largest net importer (48% of
total) of the embodied carbon in theclinker extra-regional trade.
Much of the apparent success indecreasing domestic emissions has been
more than offset by an increase inembodied emissions in imports. Unlessconsumption-based accounting is used,countries may meet their Paris Agreementtargets while being responsible forincreasing emissions abroad, as occurredwith the Kyoto Protocol. The EU as agroup nearly succeeded in meeting its
target (due both to intentional action andto economic recession), and Russia andthe former Soviet states reduced

The Carbon Loophole in Climate Policy

44emissions even beyond their Kyoto
targets. During the period of Kyoto(1990-2011), while Annex B countries
reduced territorial emissions by 1.59Gt/yr,
nearly that same amount, 1.67Gt/yr, wasembodied in net imports back in to thosecountries.
In many countries, the magnitude ofembodied emissions transfers is on parwith that of their original Kyoto reduction
target. The United Kingdom and Poland
are perhaps the most striking cases for
how outsourcing emissions-intensive
production has helped countries meettheir targets. Both countries report
reductions that exceed their targets,however, once emissions embodied intheir imports are included, they no longer
achieve these targets. Similar outsourcing
can also be observed for countries thateither have failed to meet their targets,
such as the U.S. and Japan, or that have
met their Kyoto targets even including

emissions embodied in imports, such as
Russia. Remarkably, in all cases, changes
in emissions embodied in imports arecomparable to or larger than changes indomestic emissions. Thus, under aconsumer responsibility principle,
developed countries have not recorded a
decrease from 1990 levels, but rather anincrease.
The Paris Agreement, struck in 2015, sets
voluntary emissions targets for 2020 andbeyond. The EU, for example, has
extended its original Kyoto target to now
aim for a 40% reduction in emissions
below 1990 levels by 2030. Given thediscrepancy between Kyoto Protocol
targets and actual consumption-based
emissions, countries’ progress in meeting
their Paris targets must be reconciled with
their embodied emissions in the future.
Otherwise, the trend of decreasing
territorial emissions while increasing total
carbon footprint is likely to continue.

The Carbon Loophole in Climate Policy

45

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The Carbon Loophole in Climate Policy

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Appendices

Appendix 1. List of Acronyms
AIIOT
BTA
CBA
CH4
CIS
CO2
EE-MRIO
ETS
GHG
GRAM
Gt
GTAP
ICIO
IMF
IPCC
IO
LCA
MRIO
Mt
NOx
OECD
ODS
PBA
SO2
SOX
TCBA
UNFCCCWIODWTO

Asian International Input-Output Tables
Border tax adjustment
Consumption-based accounting
MethaneCommonwealth of Independent States
Carbon dioxide
Environmentally extended multiregional input-output
Emissions trading system
Greenhouse gas
Global Resource Accounting Model
GigatonGlobal Trade Analysis ProjectInter-Country Input-Output Database
International Monetary Fund
United Nations Intergovernmental Panel on Climate Change
Input-output
Life cycle assessment
Multiregional input-output
MegatonNitrogen oxides
Organisation for Economic Cooperation and Development
Ozone-Depleting Substances
Production-based accounting
Sulfur dioxide
Sulfur oxides
Technology-adjusted consumption-based accounting
United Nations Framework Convention on Climate Change
World Input-Output Database
World Trade Organization

Appendix 2. List of Figures and Tables
Figure 2.1.

Global CO2 emissions and proportion embodied in trade

Figure 2.2.

Territorial and consumption-based emissions trajectories for developed
and developing countries, 1970-2011
Figure 2.3.1. National trends in embodied carbon trade: ratio of exports to imports,
1990-2015
Figure 2.3.2. Embodied emissions as percentage of global emissions
Figure 2.4.
Map of balance of trade in embodied CO2

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Figure 2.5.
Figure 2.6.
Figure 2.7.
Figure 2.8.
Figure 3.1.1.
Figure 3.1.2.
Figure 3.1.3.
Figure 3.1.4.
Figure 3.1.5.
Figure 3.2.1.
Figure 3.2.2.
Figure 3.2.3.
Figure 3.2.4.
Figure 3.3.1.
Figure 3.3.2.
Figure 3.4.1.
Figure A.4.1.
Figure A.4.2.
Table 2.4.
Table 2.5.1.
Table 2.5.1.
Table 3.3.1.
Table 3.3.2.
Table 3.3.3.
Table 3.4.1.
Table 3.4.2.
Table 3.4.3.
Table 4.2.1.
Table 4.6.1.
Table A.4.1.
Table A.4.2.
Table A.4.3.

Top international flows of embodied carbon
Export destinations from the South
Same-sector carbon intensity (kg CO2 emission per $US1 of production)
Net imports for the U.S., UK, and EU, have plateaued in recent years.
Top 15 extra-regional flows of CO2 emissions related to the international
trade of commodity steel in 2016
World trade of carbon embodied in commodity steel by region (kton CO2)
in 2016
Embodied carbon of top 10 major exporter countries of commodity steel in2016 (kton CO2)
Value-added steel product export worldwide in 2000 and 2013
Embodied carbon of exported value-added steel products for top 10
countries in 2013 (kton CO2)
The main extra-regional flows of CO2 emissions relating to theinternational cement trade in 2014
The main extra-regional flows of CO2 emissions associated withinternational clinker trade in 2014
World trade of carbon embodied in cement by region in 2014 (kton CO2)
World trade of carbon embodied in clinker by region in 2014 (kton CO2)
China’s territorial and consumption-based emissions
Chinese import and export volumes in monetary terms, 2005-2016
India’s territorial and consumption-based emissions
Top 10 exporters of CO2 emissions embodied in the cement trade (ktonCO2), 2014
Top 10 exporters of CO2 emissions embodied in the clinker trade (ktonCO2), 2014
Top importers and exporters of embodied CO2
Top 40 global flows of embodied carbon (in 2015, unit: Kt)
Top largest-growing flows from 1995-2015, ranked in absolute terms andshown as percentage growth rate
China’s embodied carbon balance of trade (Unit: Gt CO2; Year: 2015)
Top 10 Sectors by share of sectoral emissions induced by foreign final
demandChina’s trade partners, by import and export of embodied CO2 (Unit: Gt
CO2; Year: 2015)
India’s embodied carbon balance of trade (Unit: Gt CO2; Year: 2015)
Top sectors in India by share of sectoral emissions attributable toproduction for export (Year: 2015)
India’s trade partners, by import and export of embodied CO2 (Unit: Gt
CO2; Year: 2015)
Review of main MRIO databases
CBA Policy applications by product lifecycle phase
Top 20 trade flows of Portland cement among countries in 2014 (UN 2018)
Top 20 trade flow of Clinker among countries in 2014 (UN 2018)
Top 20 importing countries of commodity steel in 2016 (Worldsteel 2017)

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Appendix 3. Data and Methods Used in this Report
A3.1. Global MRIO method
Carbon footprints for nations were calculated using the Eora multiregional input-output
database (MRIO) using the standard Leontief demand-pull environmentally-extended
input-output model. National total footprints were taken from the year 2015, the mostrecent year available.
The calculation of carbon footprints using an MRIO database is described in many
papers, including Kanemoto et al. 2016; Peters et al. 2011; Kanemoto et al. 2012; andWiedmann 2009. The Eora MRIO is available online at worldmrio.com and is described inLenzen et al. 2012. Footprints in each country consider gross final demand, not justhousehold final demand, i.e. they are inclusive of government purchases and change ininventories.
The general framework consists of connecting inventories of primary emissions in eachsector in a standard multi-regional input-output (MRIO) model in order to track embodied
GHG emissions to the country of final consumption. The framework extends monetarytransactions between sectors and between countries into embodied carbon emission
flows. The territorial carbon emissions associated with production (p) in country s, F(p)s,can be decomposed into embodied emissions in consumption, in imports, and inexports. Following the formulation in Kanemoto et al 2012 the equation may be written:

where f is carbon intensity (factor intensity), L is the Leontief inverse (Leontief 1970), y is
final demand, i and j are sector of origin and destination, and r and s are exporting andimporting country. t is the country of last sale in the consumption and imports terms and t
is the country of final consumption in the exports term.
The number of sectors defined by emissions inventories (following the IPCC guidelines)
is generally less than the number of products individuated by the Eora MRIO. In this casethe emissions from a broadly defined sector are attributed amongst daughter sectors
using sectoral gross output as a pro-rating scheme, unless superior sector-wiseemissions data are available. For key countries (U.S., China, India), these sector-wiseemissions factors are checked manually.
There are several papers and reports that provide an introduction to the the calculationof consumption-based accounts using MRIO:� Wiedmann, T. (2009). Editorial: Carbon Footprint and Input-Output Analysis - An
Introduction. Economic Systems Research, 21(3), 175–186.
https://doi.org/10.1080/09535310903541256
� Schaffartzik, A., Sachs, M., Wiedehofer, D., & Eisenmenger, N. (2014). Environmentally
Extended Input-Output Analysis. (U. of K. Institute for Social Ecology, Ed.). Vienna.

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54� Kitzes, J. (2013). An Introduction to Environmentally-Extended Input-Output Analysis.
Resources, 2(4), 489–503. Retrieved from http://www.mdpi.com/2079-9276/2/4/489
� Eurostat Input-Output Manual - Along with the UN SNA, the canonical reference
manual.
� Input-Output Analysis: Foundations and Extensions - The textbook by Miller and Blair� Prof Lenzen's MRIO lecture video seriesThis report focuses just on CO2 as a greenhouse gas (GHG). CO2 is the dominant
greenhouse gas, responsible for >70% of total radiative forcing (IPCC 2007, Table 2.1).
The other non-CO2 anthropogenic GHGs will have slightly different trade profiles, as
those gases are implicated in a slightly different set of products. For example, CH4emissions are greater from agricultural production, particularly beef and rice production.
So embodied flows of CH4 will follow trade flows of those CH4-goods, in the same way asembodied flows of CO2 follows CO2-intensive goods. Furthermore, some non-CO2 GHGs
are more difficult to attribute to an economic production activity; for example, CO2
emissions from biomass burning or land use change. As of the time this report was
written, properly allocating non-GHG emissions to sectors and products was an active
area of research. In sum, while the flows of non-CO2 GHGs represent a minority share of
total GHG emissions, in future study is is important to consider these other GHG gases
alongside CO2.

A3.2. Data and methods used for industry case studies
To calculate the carbon embodied in the trade of cement and steel, we collected thetrade data for these commodities as well as CO2 emissions factors for thecountries/regions analyzed.
For the cement industry, we looked into carbon embodied in the trade of both cement
and clinker. Clinker is an intermediary product in the cement production process. We
obtained the clinker and cement trade data from the UN Comtrade database (UN 2018).
The latest year for which the cement and clinker trade data were available on UN
Comtrade was 2014. The CO2 intensities for the cement and clinker production fordifferent regions/countries of the world studied were obtained from the Cement
Sustainability Initiative (CSI)’s Getting the Numbers Right (GNR) database, which is avoluntary, independently-managed database of CO2 and energy performance
information on the global cement industry (WBCSD/CSI 2018). The latest year for which
the CO2 intensity for cement and clinker production was available in the GNR databasewas 2015.
For the steel industry, we analyzed the carbon embodied in the trade of both commodity
steel and steel-containing goods (value-added steel). The international trade data ofboth commodity steel and value added steel were obtained from three reports by theWorldsteel Association (worldsteel, 2015, 2016, 2017). For the commodity steel, the latest
year for which the trade data were available was 2016, whereas for value added steel,the latest data were for 2013. The CO2 intensity of steel production in different
regions/countries were obtained or estimated based on various sources (Hasanbeigi etal. 2016, JRSF 2016, Pal et al. 2014, Lisienko et al. 2015, Erickson 2013, IEA 2015, IEA2012).

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Appendix 4. Additional results tables and graphs

Figure A.4.1. Top 10 exporters of CO2 emissions embodied in the cement trade (kton CO2), 2014

Figure A.4.2. Top 10 exporters of CO2 emissions embodied in the clinker trade (kton CO2), 2014

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Table A.4.1. Top 20 trade flows of Portland cement among countries in 2014 (UN 2018)
Reporter

Flow

Partner

Amount (tons cement)

Pakistan

ExportAfghanistan

4,091,766

ThailandExportMyanmar3,600,985

ThailandExportCambodia

3,535,335

Oman

ImportUnited Arab Emirates

3,183,943

Singapore

ImportJapan

3,125,603

Japan

ExportSingapore

2,959,255

CanadaExportU.S.

2,727,471

U.S.

ImportCanada2,282,648

Sri Lanka

ImportIndia

2,270,517

Iraq

ImportIran2,075,749

KuwaitImportUnited Arab Emirates

1,846,618

United Arab Emirates

ExportKuwait

1,815,683

Portugal

ExportAlgeria

1,787,355

U.S.

ExportCanada1,786,113

Algeria

ImportPortugal

1,699,945

MyanmarImportThailand

1,647,734

BelarusExportRussian Federation

1,589,700

Russian Federation

ImportBelarus1,502,060

China

ExportMongolia

1,472,213

India

Export

Sri Lanka

1,471,115

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Table A.4.2. Top 20 trade flow of Clinker among countries in 2014 (UN 2018)
Reporter

Flow

Partner

Amount (tons cement)

Viet Nam

ExportBangladesh

6,215,747

Sri Lanka

ImportIndia

1,773,271

ThailandExportBangladesh

1,512,996

Australia

ImportJapan

1,477,908

Japan

ExportAustralia

1,445,905

India

ExportEgypt

1,310,140

Indonesia

ImportViet Nam

1,264,288

China

ExportAustralia

1,187,700

United Arab Emirates

ExportKenya

1,181,175

Australia

ImportChina

1,129,326

Nepal

ImportIndia

1,124,100

KuwaitImportIran

1,091,128

Viet Nam

ExportOther Asia

1,088,039

United Arab Emirates

ExportEgypt

1,052,979

Chile

ImportRep. of Korea

1,002,929

Malaysia

ImportViet Nam

979,116

Viet Nam

ExportIndonesia

959,473

India

Export

Sri Lanka

952,558

Peru

ImportRep. of Korea

905,217

Rep. of Korea

ExportChile

897,460

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Table A.4.3. Top 20 importing countries of commodity steel in 2016 (Worldsteel 2017)
Rank

Top Importing Countries

Total imports (Mt steel)1

European Union (28)

40.4

2

United States

30.9

3

Germany

25.5

4South Korea

23.3

5

Italy

19.6

6

Vietnam

19.5

7

Thailand

17.6

8

Turkey179France

14.6

10

China

13.6

11

Belgium

13

12

Indonesia

12.6

13

Mexico12.5

14Poland

10.1

15

India

9.9

16

Spain

9.4

17

Egypt

9.2

18

Netherlands

8.4

19

Taiwan, China

7.9

20

Canada7.7

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Appendix 5. State of knowledge for tracking embodied carbon
A5.1. Methodology for Tracking Embodied Carbon
Input-output analysis is an economic accounting method developed in the 1970s by
Leontief (Leontief 1974) that documents the financial flows between sectors, and can beused to follow supply chains. Input–output accounting can attribute pollution associatedwith production to final consumers, making it a foundational tool for calculating carbon
footprints. Multiregional input-output (MRIO) tables can be used to estimate
consumption-based inventories of CO2 and other greenhouse gas emissions. In thisreport, the Eora global MRIO is used to gain a high-level view of the carbon loophole.
Eora represents a new generation of high-resolution input-output models that are
detailed enough for policy use. The choice of Eora over other available MRIO models,and a review of the reliability of MRIO-based accounts are both discussed below.
Life cycle analysis (LCA) was the first method used to conduct embodied emissions
accounting. LCA -- a process-based, or bottom-up method -- looks in detail at all stages
along a production or supply chain, and quantifies the emissions from each stage. While
LCA can deliver highly accurate results for particular products and processes understudy, the system or study boundaries are defined arbitrarily. LCA results are often notdirectly comparable and cannot be summed.
To comprehensively account for international flows of embodied carbon, national-levelaccounts are needed. Ahmad and Wykoff (2003) from the OECD prepared one of theearliest estimates of embodied CO2 in international trade using the national-averagecarbon intensity of each country to estimate the embodied carbon in exports. The
original National Footprint and Biocapacity Accounts from the Global Footprint Network(2005) were another early effort. Their approach was to apply embodied emissions
intensities (embodied CO2/kg) multipliers taken from LCA studies to the physical volumeof trade in goods between countries, though this analysis still suffered from theboundary issues of LCAs discussed above.
Lenzen (2001, 2004), Weidmann et al. (2007), Lutz (2005), Turner et al. (2007), Tukker etal. (2006) were some of the earliest studies using input-output analysis to calculate
embodied emissions. Input-output accounting, with refinement, is the primary accepted
method for calculating CBA (consumption based accounting) today. Input-output analysis
was extended early on to account for flows between regions (countries or states,
depending on the model’s scope), and to additionally track nonmonetary inputs to
production (including land, and pollution emissions), to form what is today referred to asenvironmentally extended multi-regional input-output accounts (EE-MRIO). EE-MRIOs
attribute emissions to a primary production activity (mining, smelting, growing paddy
rice, and so on), then track those associated goods through monetary supply chainsconsisting of potentially many trade and transformation steps. The standard method toattribute emissions to consumers is called the Leontief demand-pull model, so called
because in this approach one starts with a given consumption bundle (such as for ahousehold or business) and uses the Leontief inverse model to “pull” production, andwith it embodied carbon, to satisfy that demand bundle (Schaffartzik et al 2014, Kitzes
2013, Leontief 1986, and Wiedmann 2009a).

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A5.2. Measuring Embodied Carbon with MRIO Models
Early studies estimated the carbon footprint of nations using simply a domestic
input-output model and then making a simple domestic technology assumption about
the embodied carbon content of imports, by assuming that imports had the same carbon
intensity as domestic production or that they had world-average carbon intensity.
Since around 2010, global MRIOs have become available. Global MRIOs are continuallyseeking to add more sectoral detail and more regional/country-level resolution. Higher
resolution in both these regards makes the model more accurate. Multiregional
input-output (MRIO) models are recognized as the best available tool for tracking
embodied carbon in traded goods. For analysis at the sectoral, national, andinternational scale, they are preferable to LCA-based approaches because they do not
suffer from boundary issues and double-counting risk. MRIO results have been used torecommend targets and policies based on embodied carbon. Tukker et al. (2013)provides a useful overview of the main global MRIO databases (recreated in Table 1).
Database
Name

Countries

Detail (Industries
x Products)

Time

Extensions

EORA

Around 150

Variable (20-500)

1990-2009

VariousEXIOBASE

40

200 x 200

2000, 200730 emissions types, 60
energy carriers, water,
land, 80 resources

WIOD

40

35 x 59

1995-2009

Socio-economic andenvironmental accounts

GTAP-MRIO

129

57 x 57

1990, 1992, 1995, 5 greenhouse gases,
1997, 2001, 2004, land use, energy volumes,
2007
migration

GRAM

40

48 x 48

2000, 2004

Various

AIIOT

Asia-Pacific(8-10 countries)

56 x 56 through76 x 76

1975-2005

Employment

OECD ICIO

57

37 x 37

1995, 2005,
2008-2011,2015-2016

CO2, value-added

Eora (Lenzen, Kanemoto et al. 2012, Lenzen, Moran et al. 2013) avoids the labor-intensive
assembly process used by other MRIOs by using of a high degree of automation andsophisticated data-handling algorithms. The result is a model covering all 189 countriesof the world with a variable degree of sectoral resolution ranging from 26 sectors for thelowest resolution countries to >400 sectors of detail for the major economies (UK, U.S.,
Japan). The use of heterogeneous classifications allows the model to primarily use
official national data and offer high sectoral detail.
EXIOBASE (Tukker, de Koning et al. 2013; Wood 2015) is the product of several million
Euros of investment over three EU projects, bringing the project to the current version,
EXIOBASE3.

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WIOD (Dietzenbacher, Los et al. 2013) is a simple and effective MRIO covering the 40
largest economies in the world plus a Rest of World trade partner. WIOD has lower
sectoral detail than other MRIOs (only 35 sectors per country) and has not released GHG
satellite accounts more recent than 2012. It is relatively easy to use - unlike the othermodels, it can be effectively run in Excel - and is popular among economists.
GTAP (Narayanan et al 2008) is a collection of IO tables for 140 countries/regions. At
least two MRIOs have been constructed using these IO tables: the MRIO used by Petersand Andrews for their papers (Peters 2008A, 2008B, Hertwitch 2009, Andrew 2013,
Davis et al 2011, Peters 2011a, 2011b), and the EU-funded OpenEU model (Weinzettel,
Steen-Olsen et al. 2011, Galli, Weinzettel et al. 2012). GTAP has its roots in agricultural
economics so it has a slightly higher sectoral detail than other models on agriculturalcommodities.
The GRAM model (Wiebe et al 2012) from 2012 covers OECD member states and key
trading partners. The Asian Input-Output database (AIIOT) (Meng et al 2013) was an
MRIO with a focus on trade within Asia developed by Japan’s development agency,
IDE-JETRO. These models were advanced at the time they were published, but haveeffectively been superseded by the current generation of global MRIOs.
The OECD ICIO database uses the OECD’s collection of country-level input-output
tables for 57 countries and 37 industries. ICIO also has unique data on ‘trade invalue-added’. Using IEA data on fuel combustion, Wiebe and Yamano (2016) extended
ICIO to include CO2 emissions that can be used for consumption-based accounting.
Recently there are some early attempts to build nested models. One is a model thatplaces a sub-national IO model of the Chinese provinces inside the Eora global model(Wang 2015). Bachmann et al (2015), Wenz (2015), and the SNAC approach of Edens et al(2015) are also notable examples. A more ambitious approach is the Virtual IELab projectby Lenzen’s group (Lenzen et al 2014). This is spiritual successor to the Eora model. The
IELab offers a software framework for a multiply-nested ultra high resolution global
model. The IELab software has been developed using Australia as a test case, and isbeing built out one country at a time.

A5.3. Why Eora?
The Eora input-output model provides a current, comprehensive, and high-level view ofglobal traded carbon. The Eora model also features high sectoral detail, which provides
the starting point for the sector-specific deep dive analysis above. The model
distinguishes from 26 to 500 sectors in each of 189 countries. The analysis of embodied
carbon in traded goods is calculated from an EE-MRIO table using the widely accepted
Leontief input-output method. Whereas previous models mostly cover aggregatedregions or just a subset of countries, Eora includes all UNFCCC countries for the years
1970 to 2011, with improved detail such as non-CO2 emissions and confidence estimates
for all results. Eora’s increased resolution does not alter its basic results on embedded
emissions (Davis and Caldeira, 2010; Peters et al., 2012), but it does give policymakers
more detailed results that can inform their decision-making.
The Eora MRIO (worldmrio.com) used in this project has several advantages over othermodels:1. It tracks every country in the world (190 countries), while other models use
aggregated regions
2. It provides a comprehensive annual time series (1970-2015)
3. It provides the highest level of sectoral detail, with a total of 15,000 sectors / 5 billion
supply chains across 190 countries

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4. It is built using sophisticated optimization methods to reconcile conflicting data, soevery result datapoint is accompanied by an estimate of its reliability.
The Eora database is regularly used in academic research on embodied carbon. The
main two papers presenting Eora have been cited 750 times. The same methodology
used for generating carbon footprints can also be applied to study otherembodied/indirect flows, such as air pollution, virtual water, land use, and material flows.
In economic contexts the footprint concept is used to study value-added stages along
global supply chains, and Eora has been used by the UN Commission on Trade andDevelopment to build their Global Value Chain Database, and by the IMF for their annual
World Economic Outlook.

A5.4. Key Points of Uncertainty in the MRIO models
Eora does have some areas of uncertainty. Eora has higher uncertainty about embodied
emissions transfers due to trade in services because the data on trade in services is lessdetailed. Another limitation of Eora is poorer data availability for the years 1970 to 1989.
For those years, the MRIO is built by extrapolating from the 1990 MRIO table using theconstrained optimization method described in Lenzen et al., 2012a. In addition, Eora canonly be as accurate as its underlying data. Official Chinese CO2 emissions estimates may
be unreliable to the degree of over a gigaton within a single year (Guan et al. 2012);
however to our knowledge no better alternative currently exists.
Recent years have seen a proliferation of global MRIO tables that are used with thestandard Leontief model to calculate consumption-based footprints for countries. Whilethese accounts ostensibly seek to reach the same result – a global production andconsumption database with explicit representation of trade, combining the economic andtrade statistics published by major statistical bureaus – due to various implementation
details there is nevertheless appreciable divergence between results as published byvarious research groups. Here we summarize the results from key studies why thesemodels diverge (Moran and Wood (2014), Owen et al (2014), Owen et al (2016),
Steen-Olsen et al (2014), Steen-Olsen et al (2016), Kanemoto et al 2012, and Inomata andOwen (2014)).
CBA accounts consist of three main components: a transactions matrix matrix T
describing the economic structure, an environmental stressors matrix S describing the
per-sector direct environmental impacts of production, and a consumption bundle Y
describing the composition of the demand bundle whose footprint is being measured.
The total CBA footprint is a function of these three variables. Across various reported
CBA results, the consumption bundles for each country are quite consistent. There issome minor variation across models, due to different classification schemes, a certain
degree of data conflict and uncertainty, and some issues around disaggregation of final
demand. The biggest source of uncertainty in final demand is changes in inventory:
different models and modelers make different assumptions about how these should (orshould not) be amortized (Peters et al. 2012).
The transactions matrix (also called a flows matrix, or if the transactions are expressed
not in absolute value but in as fractions of one unit of output a technical coefficientsmatrix) documents the transactions between various sectors within and across countries.
This is the most complex part of the MRIO to assemble. There are several challenges.
Countries do not use the same sectoral classification for their official IO tables. Globally,
the sum of reported exports does not equal the sum of reported imports, and thedifference is very significant (~30%). Often two or more agencies publish official data
which should report the same value for the same flow (e.g. total national GDP), but donot. Finally, trade statistics document exports per sector, and imports per sector, but
most often these are simply totals so some estimation is needed to allocate exports of
one sector amongst import sectors in the receiving country. These issues are wellunderstood and solving them is the primary work of MRIO builders.

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Surprisingly, despite these significant challenges in assembling the core of the MRIOs,
the transactions matrix is not the largest source of disagreement among CBA results.
The major source of disagreement is actually the environmental stressor accounts. This
is where GHG emission are attributed to primary production activities. There are several
major reasons for disagreement: which gases are included in the study, which line items
are included in the study (e.g. some studies include emissions from biomass burning, orfrom land-use change, while others do not), different data sources for emissions, and theallocation of emissions to sectors.

A5.5. Summary of the MRIO Literature
Carbon leakage (i.e. the carbon loophole) is a substantial and growing problem,
especially since leakage shifts CO2 emissions from developed to developing countries.
The initial Kyoto Protocol discussions did not prioritize carbon leakage as it was
anticipated to be a minor issue (Intergovernmental Panel on Climate Change, 1995).
However, many recent studies have shown that up to 30% of global emissions are linked
to production for export (Aichele and Felbermayr, 2012; Andrew et al., 2013; Davis andCaldeira 2010; Caldeira and Davis, 2011; Chen and Chen, 2011; Hertwich and Peters,
2009; Nakano et al., 2009; Peters and Hertwich, 2008b; Peters et al., 2011a, 2011b).
When using consumption-based accounting instead of a territorial emissions inventory, it
is evident that the UK’s total carbon footprint increased 12% between 1992 and 2004, notdecreased by 5% as the territorial emissions accounting indicates. This is because
increasing consumption in the UK was supplied by emissions-intensive imports, notdomestic production (BBC News, 2008; Wiedmann et al., 2008, 2010). In China, nearly
30% of the country’s emissions in 2005 were linked to production for export (Feng et al.,2013; Weber et al., 2008; Davis and Caldeira 2010). Since export production has driven
much of its emissions growth (Minx et al., 2011), China has argued that responsibility foremissions should lie with the final consumers of goods as well as the producer (BBCNews, 2009; Information Office of the State Council of China, 2011; Leggett, 2011).
For non-CO2 GHGs, this burden-shifting effect is similar and, in some cases, stronger
than for CO2. In addition, the same pattern of emissions displacement has historicallyalready occurred for air pollution - despite aggressive legislation of SO2, NOx andparticulate matter in major emitting countries, total global air pollution emissions haveincreased (Kanemoto et al. 2014).

A5.6. Alternative Approaches to Attributing Responsibility for Emissions
The firms and jurisdictions in which the emissions occur have the greatest immediate
control over those emissions, but the responsibility for emissions can be attributed
otherwise. For a while, there was much discussion about historical responsibility - whichargued that responsibility for abatement should be allocated not based on shares ofcurrent emissions but instead based on cumulative historical emissions. Anothersuggested approach was shared producer-consumer responsibility (Gallego 2006,
Lenzen 2006). This proposed a framework for allocating responsibility amongst multiple
parties along a multi-stage supply chain from emitter to consumer.
Businesses are often more concerned with carbon supply chain risk rather thanresponsibility. This perspective uses the exact same tools as for allocating responsibility:
instead of taking some moral or legal responsibility for upstream emissions, business areoften more concerned with potential regulation or costs associated with carbon-intensive
stages of upstream supply chains.

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