Energy Economics 39 (2013) 177–186

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Energy Economics

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Parcelling virtual carbon in the pollution haven hypothesis

Luis Antonio López, Guadalupe Arce, Jorge Enrique Zafrilla ⁎Universidad de Castilla-La Mancha Facultad de Ciencias Económicas y Empresariales, Plaza de la Universidad n. 1, 02071 Albacete, Spain

⁎ Corresponding author. Tel.: +34 967 599 200x2183E-mail addresses: Luis.LSantiago@uclm.es (L.A. Lópe

Guadalupe.Arce@alu.uclm.es (G. Arce), Jorge.Zafrilla@uc1 Antweiler et al. (2001) propose a model that allow

pollution into scale, technique and composition effectstence of PHH; they conclude that international trade hasvironment and SO2 emissions decrease by 1% when cothe 1971–1996 period. Furthermore, He (2006) propmodel to study the relationship between foreign direct insions and confirms the existence of PHH in China duringically, the author finds that a 1% increase in FDI increaseprovides evidence for the existence of PHH. queryIn thave been found to confirm the PHH, however, pollutioas the effect produced by the tightening of environmensions of companies, has been amply confirmed (Ederin2009; Levinson and Taylor, 2008; Wagner and Timmins

0140-9883/$ – see front matter © 2013 Elsevier B.V. Allhttp://dx.doi.org/10.1016/j.eneco.2013.05.006

a b s t r a c t

a r t i c l e i n f o

Article history:Received 3 May 2013Received in revised form 4 May 2013Accepted 5 May 2013Available online 13 May 2013

JEL Classifications:F14Q56L9

Keywords:Pollution haven hypothesisGlobal value chainInput–outputSpain‐China trade

The methodology proposed in this paper allows us to parcel the pollution haven hypothesis (PHH) into abi-regional input–output framework to analyse whether the specialisation of countries in different stagesof production and/or in final goods trading generates an increase or a decrease in global emissions as a con-sequence of international trade. We apply the model to the Spain–China trade relationship as it existed in2005, finding a PHH of 29,667 KtCO2. If this trade had not existed (so each country had met its demand forintermediate and final goods), global emissions would have been reduced by these 29,667 KtCO2. Of thisPHH, 43.5% corresponds to imports of final goods; 32.4% is related to imports of intermediate goods for thelast stage of production; the remainder, 24.1%, is caused by global value chains (GVC) between the countries.Only 3229 KtCO2 of PHH emissions are linked to domestic emissions from the sector in which the imports areproduced; the rest is explained by domestic linkages or successive rounds of domestic production, whichsupports the existence of an indirect PHH. Together with a trade growth in the last years, the fall of trade bar-riers would have implied a transformation of global production chains that have boosted global emissions.

© 2013 Elsevier B.V. All rights reserved.

1. Introduction

From the point of view of the global economy, the most efficientframework is to produce goodswhere, direct and indirectly, theproduc-tion pollutes the least, where an environmental comparative advantageexists (Peters and Hertwich, 2008). The pollution haven hypothesis(PHH) occurs when a reduction in trade barriers increases trade andsubsequent emissions because firms seek to exploit other comparativeadvantages (Copeland and Taylor, 2004), like low salaries and energycosts, the lack of environmental regulations, etc. A branch of the litera-ture has studied the existence of PHH using econometric regressionmodels (Antweiler et al., 2001; He, 2006),1 and another branch of theliterature has addressed the importance of evaluating this hypothesis

.z),lm.es (J.E. Zafrilla).s decompose trade effects onwithout confirming the exis-a positive influence on the en-nsidering 44 countries duringoses a simultaneous equationvestment (FDI) and SO2 emis-the period 1994–2001. Specif-s SO2 emission by 0.09%, whichhe literature some difficultiesn haven effect (PHE), definedtal legislation on location deci-gton et al., 2005; Kellenberg,, 2009).

rights reserved.

using the input–output framework through virtual carbon in exportsminus virtual carbon avoided by imports (Ackerman et al., 2007; Chenand Chen, 2011; Dietzenbacher and Mukhopadhyay, 2007; Peters etal., 2007; Zhang, 2012).

International trade has increased from 5.5% to 21% of worldwideGDP from1950 to 2007 (WTO-UNEP, 2009). Environmentally, the effectis such that 26% of CO2 emissions linked to production in the worldeconomy in 2008 are internationally traded (Peters et al., 2011). Themethodology of emissions balance, production-based emissions minusconsumption-based emissions, shows how this effect differs betweendeveloped and developing/emerging countries (Chen and Chen, 2011;Peters and Hertwich, 2008; Peters et al., 2011; Peters et al., 2012). De-veloped countries have a deficit and developing countries have a sur-plus; the former import energy and CO2 intensive goods directly orindirectly in exchange for environmentally-friendly exports and havea higher level of consumption or a deficit in trade (Davis and Caldeira,2010; Steen-Olsen et al., 2012). Nevertheless, it is not possible to usethe emissions balance to know if international trade increases or de-creases global emissions because the aggregation of worldwide tradeand emissions balances for all countries is always zero, whereas fortwo regions, the trade balance influences the emissions balance. JakobandMarschinski (2012) show that the sign of the emissions balance de-pends on the trade balance, the energy intensiveness of the economy,emissions intensiveness, and, finally, the comparative advantages de-rived from the specialisation processes in the countries.

The PHHmeasure proposed by Dietzenbacher and Mukhopadhyay(2007) isolates the effects of comparative advantages in the evolutionof emissions in international trade through the emissions induced by

3 This final element is where the feedback effects are produced that was studied bySu and Ang (2011) by using emissions balances in a MRIO and a single region environ-mental model context (EEBT, embodied in bilateral trade, without differentiating be-tween final and intermediate inputs). However, our proposal is different than andcomplementary to the study of Su and Ang (2011) because, when we do the calcula-tions of the balance of avoided emissions, we propose an analysis to determine wheth-er trade increases or reduces global emissions, and we are allowed to isolate the impactthat global value chains and the trade of final goods have on these analysed countries.

4 Chen and Chen (2011) define it as emissions linked to imports and emissionsavoided by those imports, even considering that the result is not identical.

5

178 L.A. López et al. / Energy Economics 39 (2013) 177–186

1 billion units of additional exports and those avoided by 1 billionunits of imports between two regions. These authors apply this meth-odology in a single region input–output model for India during the1991/1992 and 1996/1997 periods and find a positive sign. This resultconfirms a reduction of emissions because of international trade be-cause firms locate production in more environmentally efficientcountries and PHH therefore does not occur. The expression used byPeters et al. (2007), Ackerman et al. (2007) and Zhang (2012) is dif-ferent because the author proposes to calculate the effect that tradehas on the environment based on the calculation of total emissionsembodied in exports minus emissions avoided by imports, that wecall the balance of avoided emissions (BAE). Peters et al. (2007) finda negative balance of avoided emissions for China between 1997and 2002 and (Zhang, 2012) between 2000 and 2005, which meansa saving of emissions. However, Zhang (2012) finds a positive balancebetween 2005 and 2007; this implies that the emissions embodied inChinese exports are higher than those avoided by imports as thecountry becomes a net exporter of emissions. However, in this case,the result depends on comparative advantage and on trade volumeby sectors.

Although a country can avoid emissions through international trade,the same international trade might generate an increase in global emis-sions. First, this trade might increase or decrease emissions in the rest ofthe world (Dietzenbacher and Mukhopadhyay, 2007). In this way,Ackerman et al. (2007) use a bi-regional model which allows us to esti-mate avoided emissions related to US–Japan trade, finding a saving in areduction of 7.9 million tons in 1995, as well as a displacement of emis-sions from the US onto Japan. Second, the single-region input–outputmodel does not account for successive rounds of international produc-tion and a country that imports and produces goods may simply berelocating some of its production to a third country where it also trans-fers its associated pollution (Ackerman et al., 2007). These problemsare solved in Chen and Chen (2011) because they use a multi-regioninput–output (MRIO) model and calculate the difference between theemissions avoided by imports (EAI) and emissions embodied in imports(EEI)2 between the G7, BRIC and the rest of theworld (ROW) to evaluatethis effect. A third of international trade results from the exchange offinal goods, whereas the other two-thirds are explained by the trade inintermediate inputs (Johnson and Noguera, 2012). Energy productsand raw material trade, which are located only in certain countries, re-quire international commercialisation. In fact, 37% of global emissionsfrom fossil fuels are internationally traded (Davis et al., 2011), but thisonly explains a portion of the increase in inputs trade. Offshoring pro-cesses and global value chains (GVC) are responsible for such growthin other input trade (Cadarso et al., 2008; Egger and Egger, 2005;Feenstra and Hanson, 1996; Grossman and Rossi-Hansberg, 2006;Hummels et al., 2001). However, the literature does not include emis-sions increases linked to the international freight transport of productsthatmove around the globe as parts and components until they are final-ly assembled into final goods (Cadarso et al., 2010; Cristea et al., 2013).

In this paper, we propose a new methodology that involves thebalance of avoided emissions (BAE) in a bi-regional input–outputmodel (BRIO) context that provides information for final goods andintermediate inputs trade to determine whether trade betweenSpain and China increased global emissions. We focus our analysison the different rounds or stages of production and/or in final goodstrade to determine whether they are responsible for the existence(or not) of the PHH in terms of CO2 emissions. The distinction

2 This indicates that Chen and Chen (2011) simultaneously take into account the tech-nology of production in all considered countries, while Ackerman et al. (2007) use the da-ta of US and Japan and Dietzenbacher andMukhopadhyay (2007), Peters et al. (2007) andZhang (2012) use only the technology in the country of analysis included.

between intermediate inputs and final goods allows us to parcel theequation of PHH by countries and by type of traded good into the fol-lowing three balances in a bi-regional input–output model (BRIO): a)the BAE of final goods, b) the BAE of intermediate inputs required forthe last stage of production, and c) the BAE of intermediate inputs re-quired for all other stages of production, from the first to the penulti-mate.3 Additionally, we assess the domestic virtual carbon embodiedin goods that are imported or exported, and we differentiate betweenown-sector virtual carbon, virtual carbon embodied in inputs used di-rectly by the sector and virtual carbon embodied in the rest of thestages of production of domestic inputs used indirectly.

The paper is divided into four sections. Section 2 develops the meth-odology for parcelling the PHH in a BRIO and MRIO. Section 3 presentscertain comments about the results derived by applying this methodolo-gy to Spain–China trade. Finally, Section 4discusses themain conclusions.

2. Methodology

2.1. Parcelling the pollution haven hypothesis into a bi-regional input–outputmodel

Dietzenbacher and Mukhopadhyay (2007), Zhang (2012) andChen and Chen (2011)4 use the difference between emissions linkedto exports (EEX) and emissions avoided by imports (EAM) to evaluatewhether international trade increases or decreases emissions at aglobal level. The expression proposed to evaluate the existence ofPHH by countries 1 and 2 (which we call the balance of avoided emis-sions (BAE)) is as follows5:

BAE1−2 ¼ EEX−EAM ¼ ε1X1 þ ε2X2ð Þ− ε1M1 þ ε2M2ð Þ

¼ ε1X1−ε1M1|fflfflfflfflfflfflfflfflfflffl{zfflfflfflfflfflfflfflfflfflffl}

1:1

!þ ε2X2−ε2M2ð Þ|fflfflfflfflfflfflfflfflfflfflfflffl{zfflfflfflfflfflfflfflfflfflfflfflffl}

1:2

ð1Þ

where X1 and M1 are country 1 and country 2 exports and importsvectors, respectively, and it should be highlighted that the exportsof country 1 coincide with imports of country 2 (X1 = M2) and viceversa (X2 = M1). ε1 is the domestic emissions multiplier6 for country1, which is calculated by multiplying the direct emissions coefficientfor country 1 (e1 = E1/q1), or emissions per unit produced, by theLeontief inverse (ε1 = e1[1 − A1

d]−1), where A1d is the domestic tech-

nical coefficient matrix. EEX are emissions incorporated into the ex-ports of both countries and EAM are the emissions avoided by theimports of both countries.

Dietzenbacher and Mukhopadhyay (2007) use a similar analysis by calculating thebalance from a million Euros of exports and avoided imports, keeping constant theirrelative industry distribution. A positive balance would imply that international tradegenerates a growth in emissions. Nevertheless, this measure does not allow the isola-tion of the importance of PHH because it does not consider the volume of trade. How-ever, Zhang (2012) and Chen and Chen (2011) consider all exports and imports toanalyse the PHH.

6 It is also possible to define the total emissions multiplier, considering all emissions,domestic and imported, required for production within a country (ε2t = e2[1 − A2

t ]−1

for country 2).

179L.A. López et al. / Energy Economics 39 (2013) 177–186

Different results of the BAE can only be explained by the differentpollution intensities of the trading countries because exports fromone country are imports for the other country. This implies that a pos-itive balance of BAE confirms the existence of PHH because thegrowth in emissions would be explained by trade moving productionto more polluting countries. The reason is that, in that case, emissionsgenerated by trade are higher than those that had been producedwithin the country using domestic technology assumption over im-ports7 (avoided emissions) and without international trade. A nega-tive balance for the BAE implies that emissions are decreasingbecause of trade between countries because goods are producedwhere they generate the least pollution.8 However, simultaneously,with two sub-balances of avoided emissions for country 1 (1.1) andcountry 2 (1.2), it is possible to identify the country responsible, inglobal terms, of the increase (positive sign) or decrease (negativesign) of emissions and to what extent that the different industriesof both countries cause the increase or decrease in emissions via in-ternational trade.

Our contribution is the decomposition of the BAE into a bi-regionalinput–output model (BRIO) to analyse the importance of the trade indifferent types of goods, intermediate or final, over the environmentand, therefore, the importance of global chains of production. First, wedecompose international trade into final imports, y1m, and the matrixof intermediate inputs,Mi

1 ¼ Am1 1−Ad

1

h i−1yr1 þ yx

1

� �, by country 1 (sim-

ilar to country 2). Inmatrix terms,we can parcel the trade into three dif-ferent components:

M1 ¼ X2 ¼ ym1 þ Am

1 1−Ad1

h i−1� �

yr1 þ yx

1� � ¼ ym

1|{z}2:1

þ Lm1 yr1|ffl{zffl}

2:2

þ Lm1 yx1|ffl{zffl}

2:3

264

375:ð2Þ

First, we consider separately two domestic demand y1d compo-

nents of country 1; the one that remains within frontiers, y1r , that con-tain private consumption, investment and public expenditure, andexports, y1x. The use of ∧ indicates diagonalised vectors that are per-mitted to work either by rows or by columns. Lim are the import mul-tipliers for country I defined as Li

m = Aim[1 − Ai

d]−1. The expression2.1 shows imports of final goods of country 1, the expression 2.2shows imports of intermediate goods by country 1 (exports of coun-try 2) that will be used in the production process of domesticallydemanded goods in country 1, and the expression 2.3 shows importsof intermediate inputs by country 1 from country 2 that are incorpo-rated in the productive processes of country 1 that finally will beexported to another country and used in future international roundsof production. However, in a bi-regional model with two countrieswe consider that exports made by each country, such as country 1,

7 DTA assumption involves calculating the emissions embodied in imports as a uni-regional model, i.e., by using identical production technology and pollution. This as-sumption is common in the early work addressing the effects of international tradeon the environment because of the lack of data, for example, Sánchez-Choliz andDuarte (2005) and Dietzenbacher and Mukhopadhyay (2007). More recently, otherstudies, such as Andrew et al. (2009), have evaluated the discrepancies found in theemissions associated with international trade under various types of input–outputmodels. Other authors have used DTA assumption to isolate the effects that certain as-pects of the economy have on the environment, for example, Cadarso et al. (2010) usedDTA to isolate the effects that international freight transport has on the environment.

8 Mongelli et al. (2006) conclude the presence of carbon leakage phenomenon in Italyin the 1990s, but they do not find support for the existence of PHH. However, these au-thors used another more simplified expression to demonstrate the existence (or non-existence) of PHH; they posited that PHH occurs when net exports with developingcountries, as a proportion of apparent consumption, show a declining trend over time.

can be parcelled into exports to country 2, y1x2, and in exports to therest of the world, y1xrow, for which we have no information to knowwhether they are final goods or inputs.

The BAE decomposition proposal is as follows:

BAE1−2 ¼ ε1X1 þ ε2X2ð Þ− ε1M1 þ ε2M2ð Þ ¼hε1 Lm2 y

d2 þ ym

2

h iþε2 Lm1 y

d1 þ ym

1

h i�− ε1 Lm1 y

d1 þ ym

1

h iþ ε2 Lm2 y

d2 þ ym

2

h ih i¼ ε1y

m2 −ε1y

m1

� �− ε2y

m1 −ε2y

m2

� �� �|fflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflffl{zfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflffl}3:1

þ ε1 Lm2 yr2

� �−ε1 Lm1 y

r1

� �þ ε2 Lm1 yr1

� �−ε2 Lm2 y

r2

� �� �|fflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflffl{zfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflffl}3:2

þ ε1 Lm2 yx12

h i−ε1 Lm1 y

x21

h iþ ε2 Lm1 y

x12

h i−ε2 Lm2 y

x21

h ih i|fflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflffl{zfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflffl}

3:3:1

þ ε1 Lm2 yxrow2

� �−ε1 Lm1 y

xrow1

� �þ ε2 Lm1 yxrow2

� �−ε2 Lm2 y

xrow1

� �� �|fflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflffl{zfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflffl}3:3:2

:

ð3Þ

Expression 3.1 shows the BAE of final goods trade between bothcountries. Expression 3.2 shows the BAE of inputs trade that belongsto the last stage of international production; once into the country,these inputs are embodied in the production of final goods that aresold domestically. Expression 3.3.1 is the BAE linked to the rest of therounds of international production required to produce goods to attendinputs trade between countries 1 and 2. This is the case for emissions ofcountry 1 that enter country 2 and are used to produce inputs that laterwill be exported to country 1 as intermediate inputs, which show globalvalue chains between both countries. Finally, expression 3.3.2 refers tovirtual carbon embodied in inter-industrial trade between the twocountries considered (1 and 2), which finally emerge exports to therest of the world as intermediate inputs or as final demand, globalvalue chains. The sum of 3.3.1 and 3.3.2 is the term of the vertical spe-cialisation of trade shown by Hummels et al. (2001) and the study ofthe different stages in feedback effects of Su and Ang (2011) in theemissions balance in a MRIO versus that of a BRIO.

It is relevant to note that the BAE proposed formulation results inmatrices of emissions embodied in international trade and emissionsavoided by international trade that involves different assignmentcriteria of emissions depending on whether they are interpreted byrows or columns (Cadarso et al., 2012; Peters, 2008). By rows, for exam-ple, expression 3.1 represents the direct emissions associated with eachindustry of country 1, such as the electricity industry; this forms a partof the production goods of any sector of the economy that finally areexported as final goods minus direct emissions avoided by the electric-ity industry in country 1 because of imports of final goods from allbranches of the economy. By columns, the emissions are reallocatedfrom the producers of inputs to consumer industries and incorporatethem into their production processes to attend to final demand. Whenthey export goods, such as textiles, total carbon embodied in their pro-duction in country 1 is considered, directly and indirectly. By rows, sec-torial allocation criterion is an emission producer criterion; by columns,we assign emissions as a consumer of inputs criterion.

We propose the decomposition of the virtual carbon associationwith international exports by own-sector exported emissions9 (chang-ing each ε by e), emissions in direct inputs (changing each ε by eA) andvirtual carbon in indirect inputs (subtracting from total virtual carbonthe direct virtual carbon embodied in inputs and the direct virtual car-

9 Own-sector exported emissions are equal to producer emissions.

11 As noted in Zhang (2012), there are different data sources used to calculate emis-sions factors. We can find works such as those of Peters et al. (2007), Zhang (2012) orLin and Sun (2010) that, like ours, combine data on energy consumption from the Chi-na Statistical Yearbook with IPCC data on emission coefficients. Other papers, such asLiu et al. (2010), use the data provided by the Chinese Energy Statistical Yearbook

180 L.A. López et al. / Energy Economics 39 (2013) 177–186

bon of the own-sector emissions). The equation to calculate the ownbalance of avoided emissions (BAEo) is as follows:

BAEo1−2 ¼ e1X1 þ e2X2ð Þ− e1M1 þ e2M2ð Þ

¼ e1ym2 −e1y

m1|fflfflfflfflfflfflfflfflfflffl{zfflfflfflfflfflfflfflfflfflffl}

4:1

þ4:1e2ym1 −e2y

m2|fflfflfflfflfflfflfflfflfflffl{zfflfflfflfflfflfflfflfflfflffl}

4:1

264

375

þ e1Lm2 y

r2 −e1L

m1 y

r1|fflfflfflfflfflfflfflfflfflfflfflfflfflfflffl{zfflfflfflfflfflfflfflfflfflfflfflfflfflfflffl}þ e2L1m yr1−e2L

m2 y

r2|fflfflfflfflfflfflfflfflfflfflfflfflfflfflffl{zfflfflfflfflfflfflfflfflfflfflfflfflfflfflffl}

4:2

2664

3775

þ e1Lm2 y

x12 −e1L

m1 y

x21 þ e2L2m y

x12 −e2L1m y

x21

h i|fflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflffl{zfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflffl}

4:3:1

þ e1Lm2 y

xrow2 −e1L

m1 y

xrow1 þ e2L2m yxrow2 −e2L

m1 y

xrow1

� �|fflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflffl{zfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflffl}4:3:1

:

ð4Þ

Expressions 4.1, 4.2, 4.3.1 and 4.3.2 show the balance of directavoided emissions linked to the trade of final goods, intermediate in-puts for the final stage, intermediate inputs for the remaining stagesof production by countries 1 and 2 and direct emissions – associatedin global value chains – by countries 1 and 2 and the rest of the world.The difference between each component of BAE and BAEo would giveus the indirect avoided emissions linked to international trade foreach good.

The BAE proposed in the methodology has an advantage over theemissions balance because it enables the calculus that shows how inter-national trade damages the environmentwhenwe isolate the trade bal-ance. Moreover, the calculations of Jakob and Marschinski (2012) donot distinguish the different weight that the different pollution intensi-ty and specialisation that the countries have (comparative advantage)because they provide only an aggregate value for these two measures.However, as opposed to those authors, we differentiate between the ef-fect of the trade of final goods and inputs, and present the role of differ-ent global value chains and finally whether the effect depends on thedirect effect generated by exported goods or on the linkage effectsgenerated.

The BRIO model proposed to parcel the BAE to be able to evaluatevirtual carbon flows associated with bilateral trade flows betweenthese countries, leaving aside all emissions generated in any otherstages of production or trade rounds with a third country and not in-cluding international freight transport thatmust be explicitly calculated(Cadarso et al., 2010; Cristea et al., 2013). To solve the first problem, wecan work with a two-region model that considers all stages of produc-tion under the DTA assumption – changing the direct ε1 by the totalemissionsmultipliers ε1t – and assuming that the production technologyof imports is similar to the technology of the importing country. Anoth-er option is to build aMRIO that can differentiate between exports of in-termediate and final goods from countries that are considered to showthe existence of PHH, as Chen and Chen (2011) calculate for the worldeconomy grouped into three regions (G7, BRIC and rest of the world).The information that a MRIO provides is more complete than a bilateraltrade input–output model10 (BTIO); however, the MRIO diffuses re-sponsibility among agents of different countries participating in globalvalue chains because the inputs are part of global chains of productionuntil they are finally destined to attend to final demand (Atkinson etal., 2011).

Therefore, in our opinion, the proposed BRIO model is adequate toanalyse which industries and internationally traded products have anegative or positive effect on the environment through PHH and,

10 The BTIO considers multiple regions or countries, however, it does not differentiatebetween exports that go to final consumption and exports that go to intermediate con-sumption in the importing country.

from that perspective, to assess a potential agreement between coun-tries which seek to alleviate this effect or, on the other hand, to applyunilateral environmental policies when the agreement does not exist.When the agreement exists, such as a post-Kyoto framework, an ex-ample could be the adoption of a consumer or shared responsibilitycriterion where commitments would fall only on the signatory coun-tries included in the BRIO. Other countries would be excluded fromthe agreement because they are out of the jurisdiction (Cadarso etal., 2012; Peters, 2008). When there is no agreement, the situationis similar to the EU emissions trade system for 2013 (Directive2009/29/EC) that regulates the free allocation of emissions allow-ances to industries that have a risk of carbon leakage using trade in-formation between the EU and the rest of the world and withoutconsidering the feedback effects of this trade. In a similar sense,Atkinson et al. (2011) analysed how a border tax can help reduce car-bon leakage by using a BTIO to avoid the loss of responsibility throughthe feedbacks effects. However, a BRIO is more useful than a BTIO be-cause the BRIO only considers the first feedback effects in the two re-gions and not the other feedbacks, showing additional informationwithout losing the origin of the agent's responsibility.

2.2. Data sources

The data sources of this paper include the following: OECD, 2005input–output tables, valued in millions of Euros, are used to calculateemissions related to exports from Spain to China; Atmospheric Emis-sions Satellite Accounts, published by INE, provide information aboutCO2 emissions valued in thousands of tons for the same year (INE,2008). Data have been aggregated to 23 sectors. Because Spanishinput–output tables do not provide information about imports and ex-ports by destination country, we have completed them by usingDirección General de Aduanas information (Customs Department;DGA, 2011) to obtain the Spain–China trade for 2005 and 2011. Follow-ing this procedure, we obtain emissions related to both countries for thisperiod; to obtain these figureswe suppose that production and pollutingtechnology remains constant (at 2005 levels) for the entire period.

The calculation of emissions embodied in imports has also beenperformed working with OECD Chinese input–output tables (OECD,2005), which provide data expressed in 10,000 Yuanes; thus, the use ofexchange rate information from the European Central Bank was requiredto value the Chinese input–output data in Euros. The results wereaggregated to 23 sectors. There is no information about CO2 emissionsof the Chinese economy that is segmented by industries, so wemust esti-mate these data using a similar methodology to Dietzenbacher andMukhopadhyay (2007) for India, Zafrilla et al. (2012) for Spain or Peterset al. (2007), Zhang (2012) and others11 for China. The estimation ofCO2 emissions related to energy goods consumption in China isperformed using IPCC information on carbon and CO2 emissions, com-bined with data for Chinese energy consumption for 2005 by productivesector that is provided by the China Statistical Yearbook and annuallypublished by the National Bureau of Statistics of China (NBSC, 2011).

Using IPCC information (IPCC, 2006), Chinese emissions factorsvalued in carbon tons by Kt of product necessary for combustion areestimated by multiplying the calorific conversion factor (TJ by unitof energy good) by the carbon emissions factor (tC/TJ) of each energygood considered. If the carbon emission factor (tC/Kt) is multiplied bythe oxidation factor and by the CO2 conversion factor of each energy

and the China Energy Data Book. The use of different data sources can generate dis-crepancies in the amount of CO2, as Guan et al. (2012) have shown. The differences be-tween national and regional energy figures translated into emissions can reach1391 million CO2 tons.

181L.A. López et al. / Energy Economics 39 (2013) 177–186

good, the result is an emission factor valued in tCO2/Kt by type of en-ergy good. Chinese energy consumption is valued in physical units, somultiplying each emission factor by the amount of energy consumedobtains CO2 emissions by industry for the Chinese economy in 2005.

3. Empirical application to Spanish–Chinese trade

The total CO2 emissions balance between Spain and China has anacute negative sign for Spain that changes from−40,105.3 KtCO2 deficitin 2005 to −56,989.0 KtCO2 deficit in 2011. The deficit is explained bytwo main reasons. The first reason is the significant commercial deficitbetween Spain and China, where Spanish exports to China reach only12.8%/15.3% of imports in 2005/2011. The second reason is the differentintensity of emissions incorporated into the production of goods andservices for each country.12 Spain has an absolute environmental ad-vantage in terms of emission coefficients,13 such that it would be betterto produce all the goods traded between both countries in Spain(Table 1). This difference in emissions coefficients is explained by thehuge increase in Chinese energy consumption based on the use of coal(mainly anthracite), which produces almost 80% of the energy usedby industry, trade and households (IEA, 2008; Li and Hewitt, 2008).14

The unidirectional environmental policies of EU countries (thesigning of the Kyoto Protocol, the creation of the European Union Emis-sions Trading System and the different European strategies against cli-mate change) may encourage the relocation of polluting industries tocountries with weaker environmental legislation and this may deter-mine the negative sign of the balance trade. This is the carbon leakageproblem that occurs when the reduction of CO2 emissions in sector iof a country is offset by an increase of carbon-embodied emissions inimports of this sector i produced in another country with weaker envi-ronmental regulations (IEA, 2008; IPCC, 2007). In López et al. (2013), di-rect carbon leakage between Spain and China is observed, togetherwitha deficit in emissions that represents an average increase in emissionsimported by Spain between 2005 and 2008 (and in four of the 23branches) that reaches over 100% of the reduction of production emis-sions (Iron & Steel, FabricatedMetal Products, Textile, Leather and Foot-wear and Electrical Machinery and ICT).

However, it is not the direct or indirect15 carbon leakage measurethat allows us to evaluate if the existence of bilateral trade betweenSpain and China is beneficial or not for the global environment; instead,it is the PHH calculation that allows us to evaluate it. Carbon leakagecompares changes in emissions embodied in exportswith emissions re-lated to the production of one sector and does not consider the possibletechnological improvements or regulations that arose during the periodand reduced these emissions in the developed country (e.g., applied in-tensively in the electricity sector of Spain since 2005, Zafrilla et al.,2012). However, PHH is a staticmeasure for one year inwhich the prob-lem of technological change does not occur, and total emissions, directand indirect, are always considered as embodied in trade, such thatthe effect on global emissions depends on the different pollution inten-sities in both countries and the composition of trade by industry.

12 The result will depend on the country analysed, for example, US exports to Japan aremore carbon-intensive, per unit, but US imports from Japan are much larger in volume,and finally the trade between both countries reduces emissions (Ackerman et al., 2007).13 Similar differences in aggregated emissions coefficients are found by Su and Ang(2011) for 2000, when the CO2 emissions per GDP were 2.99 kg/USD in China and0.74 kg/USD in the world economy.14 However, the Chinese government intends to increase the weight of alternativecleaner technologies, including natural gas (only 5% of total energy consumption atpresent) and to close down some of the smaller and less efficient thermal centrals(according to US EIA, 2009).15 Indirect carbon leakage takes into account how changes in the prices of inputs re-quired by an industry as suppliers can lead to emissions leakage if the prices of theseinputs are affected by stricter environmental legislation (Reinaud, 2008; Sijm et al.,2004). It is usual to analyse the effects of the increase over electricity prices (Directive2009/29/CE; Kuik and Hofkes, 2010; Monjon and Quirion, 2011).

The positive result found in the BAE demonstrates that internationaltrade between Spain and China generates a negative global environ-mental effect because trade between both countries increases globalemissions 29,667 KtCO2 in 2005 (Table 1). It therefore confirms the ex-istence of the PHH between the countries. The result of this BAE for2005 represents 73.9% of the total global emissions derived from theSpain–China deficit in the emissions balance (−40,105.3 KtCO2). TheBAE is the aggregate of two sub‐balances of avoided emissions, theSpanish and the Chinese (Table 2), with a positive sign for Spain and anegative sign for China, which is explained by the Chinese trade balancesurplus and the lower levels of environmental efficiencies in all sectorsof the Chinese economy.16 These data prevent both countries' industriesform specialising where they have a comparative advantage. The firstcolumn of Table 2 shows the difference between emissions related toSpanish exports minus avoided emissions in Spain because of Chineseimports. The huge Spanish trade deficit drives a negative balance inavoided emissions of −3809.7 KtCO2 and it is negative for all types ofgoods traded. A Spain–China emissions balance of −40,105.3 KtCO2

only contributes to a global savings in emissions of −3809.7 KtCO2.However, for China we have the opposite result, and the difference be-tween emissions embodied in exports and those avoided in imports in-creased emissions by 33,477.3 KtCO2 because of the large Chinese tradesurplus. The fact that this sub‐balance has a value ten times highershows the existence of a significant PHH.

These results are consistent with the figures found by Zhang (2012)for Chinese international tradewith the rest of the world between 2005and 2007; net exported embodied carbon reached 200 MTC, whichaccounted for 13% of total domestic energy‐related carbon emissionsassociated with Chinese production in the same year.17 They are alsoconsistent with results found by Chen and Chen (2011) for 2004 witha multi‐regional input‐output model that divided the world into threesupra-national coalitions (G-7, BRIC and rest of world) and found thatworld trade increased emissions by 0.13 billion CO2 tons in 2004 overa total of 5.77 billion CO2 tons of EEI.18

The methodology proposed is useful in isolating different uses oftraded goods in the BAE. The analysis of this BAE by componentsshows that 43.48% of this PHH corresponds to imports of final goods(BAE 1), whereas 32.38% is related to imports of intermediate goodsthat are entering the last stage of production and is finally sold withinthe borders (BAE 2). As a result,more than 76% of the emissions derivedfrom Spain–China bilateral trade correspond to imports of inputs andfinal goods to attend to the Spanish and Chinese domestic final de-mands. The rest of the PHH is caused by GVC, which amounts to nearly24% of total emissions related to such trade. These are Spanish importsof intermediate goods traded again to the rest of theworld (including toChina). The high degree of detail presented in this BAE helps us to deter-mine whether imports of intermediate goods are required to exportthem later (without a differentiation between final or intermediateuses) to China or anywhere. The results show how the Spanish–ChineseGVC amounted to only 1.96% of total emissions avoided (BAE 3.1). How-ever, the remaining 22.18% of emissions correspond to exports to therest of the world (ROW, BAE 3.2). Su and Ang (2011) calculate the im-portance of these feedback effects to evaluate the difference in the

16 The calculation of Spanish PHH with other countries would give a different result.Different industries maintain different deficits and surpluses, and the emissions coeffi-cients are different by sector.17 However, Zhang (2012) is not considering the possibility that Chinese trade withother countries could increase or reduce emissions (i.e., Zhang only considers the firstelement of Eq. (10)).18 The limited effects of the PHH obtained are justified because they consider onlytrade between these three regions without quantifying PHH that occurs as a result oftrade within each considered region. At the time, production and pollution technolo-gies within each region used an average of the countries concerned and, therefore,the character of China as a polluter is somewhat masked. Furthermore, the differencein magnitudes between the two studies is because our calculations show a major def-icit in the trade balance and emissions between Spain and China, whereas in the data ofChen and Chen (2011), these scales are balanced to involve all countries.

Table 1Emissions coefficients (e) and trade for Spain and China for 2005, KtCO2 per millionof €.Source: Own elaboration from CSEA, IPCC and DGA data.

eSpain

e China Spainexports

Chinaexports

Agriculture, hunting, forestry and fishing 0.2473 0.3188 21.3 60.6Mining and quarrying (energy) 1.0697 2.6727 0.0 24.2Mining and quarrying (non-energy) 0.1004 0.4192 0.0 0.0Food products, beverages and tobacco 0.0714 0.2603 64.1 299.0Textiles, textile products, leather and footwear 0.1021 0.2131 40.0 3,017.0Wood and products of wood and cork 0.0733 0.1593 6.3 170.4Pulp, paper, paper products, printing andpublishing

0.1269 0.6530 40.5 63.3

Coke, refined petroleum products and nuclearfuel

0.6544 9.2698 5.4 7.1

Chemicals 0.2183 1.0973 309.5 533.0Rubber and plastics and other non-metallicmineral products

1.0151 3.1466 91.3 723.7

Iron and steel 0.5168 3.0733 201.2 611.1Fabricated metal products, except machinery& equipment

0.0038 0.1127 58.4 177.9

Machinery and equipment, n.e.c. 0.0291 0.1433 214.1 1,326.6Office, accounting and computing machinery 0.0098 0.0288 54.8 740.8Electrical machinery and apparatus, n.e.c. 0.0084 0.0259 150.2 2,025.5Communication eq., computers and otherelectronic eq.

0.0153 0.0428 36.5 490.9

Manufacture of transport equipment 0.0320 0.4967 192.7 160.3Manufacturing n.e.c.; recycling (includingfurniture)

0.0276 0.0689 8.1 1,255.3

Electric power, gas and water production andsupply

2.4093 12.2381 0.0 0.2

Construction 0.0191 0.0889 0.0 0.0Wholesale, retail trade, hotels and cateringservices

0.0268 0.1717 0.0 0.0

Transport, storage and post 0.2669 1.1647 0.0 0.0Others 0.0104 0.4362 0.5 5.4

Table 2Balance of avoided emissions by components in 2005, KtCO2.Source: Own elaboration.

Spain China Total Own/Initial Inputdirect

Indirectinput

BAE 1 −1,659.90 14,558.90 12,899.00 6.96.59 3,395.43 8,807.00BAE 2 −1,285.50 10,892.10 9,606.60 1,377.30 2,751.95 5,477.35BAE 3.1 −9.4 591.3 582 93.88 167.93 320.15BAE 3.2 −855 7,435.00 6,580.00 1,061.60 1,892.64 3,625.79Sum −3,809.70 33,477.30 29,667.60 3,229.37 8,207.95 18,230.29

182 L.A. López et al. / Energy Economics 39 (2013) 177–186

balance of emissions by an EEBT andMRIOmodel in 10 regions (8 Asiancountries, USA and the rest of the World) and China. They find that thefirst step explains more than the 80% of distribution of emissions em-bodied in trade with 9 of these regions, except for Singapore.19 There-fore, the bi-regional model that we apply to explain the PHH is morelikely to explain a large part of the emissions embodied in trade, al-though only it considers just the first round of production betweenboth countries.

The importance of domestic production stages in the carbon em-bodied in internationally traded goods is also shown in Table 2. Wecan see that the problem of increased emissions via PHH betweenSpain and China is not explained by the own/initial effects thatoffshoring processes have over the environment, representing only3229 KtCO2 of the 29,667 KtCO2 associated with PHH. The linkage ef-fects arise through successive rounds of production, which produce asignificant amount of environmental harm. The effect of direct use ofinputs is 8207 KtCO2 and indirect use is 18,230 KtCO2. These findingswould support an indirect pollution haven hypothesis because the fallin trade barriers would have imply a transformation of global produc-tion chains that, together with a growth in trade, would boost globalemissions. This increase would not be related to the use of a techniquethat is less efficient in terms of emissions, but because of their linkageeffects with production and emissions in the country of production/origin/destination.

19 It is important to indicate that Peters et al. (2012) show that the difference in con-sumer based-inventories when we use EEBT and MRIO is generally larger for small andtrade-exposed countries.

3.1. Balance of avoided emissions by rows-products

As described above in themethodology section,workingwithmatri-ces and vectors offinal demand and diagonalised emissions,we are ableto obtain a BAE in a matrix form (23 × 23) for each component of thebalance. Thus, we can exhaustively analyse the BAE by rows and by col-umns and it is interesting to categorise by exports of final or intermedi-ate inputs and by direct exports or to incorporate the BAE indirectly intoothers products exported. By rows or products, as Figs. 1 and 2 show,wecan highlight a selection of five products out of 23with the highest PHH(82.2% of the total), as expressed by their components in the BAE. Inter-national trade between Spain and China shows that electric power, gasand water is the industry with the highest volume of PHH, at 9315.91KtCO2, which could have been avoided if all imported goods had beenproduced in Spain. The third global ranking of products is Coke, petro-leum products and nuclear fuels, at 4792.06 KtCO2. These requirementsof energy goods (electricity, coal, gas and oil) are not traded directly be-tween the countries20; however, virtual carbon associated with thesegoods is incorporated indirectly through successive rounds of produc-tion and its effects on PHH as an indirect input are more importantthan other direct inputs.21

Trade in intermediate products is the main factor responsible for theexistence of PHH between Spain and China (Fig. 2). The second productmost responsible for PHH is iron and steel, with an emissions volume of6182.77 KtCO2. Chemical products and rubber and plastic products arefourth and fifth, with 2221.33 and 1890.53 KtCO2 of non-avoided emis-sions, respectively. The main two characteristics of these goods are thatthey are high polluting and homogeneous (and easily relocatable),which facilitates their carbon leakage phenomenon (Demailly andQuirion, 2008; Reinaud, 2008) and generates significant PHH. It is inter-esting to note that these inputs are exported directly between the twocountries incorporating virtual carbon, but the majority of these inputsare not going to final demand. Chemical and metal products are mainlyincorporated into other goods that eventually are traded between bothcountries (such as paint of toys or imported steel knives); however, plas-tic products are exported directlywithout going through other industriesand are processed within the Spanish economy that purchased it.

Direct emissions embodied in final goods exports (PHH1) of iron &steel yield a negative value of −0.37 KtCO2. These data indicate thattrade of these goods between the two countries generates a reductionin global emissions. Differences in final goods trade volume, Spanishexports minus imports from China, must be larger than the differ-ences in emissions intensities (0.52 and 3.07 for Spain KtCO2/m€ forChina, respectively) to obtain this result. This negative result occursin only 6 of the 276 possible cells (23 sectors and 12 PHH), whichleads to Spain's trade surplus savings of only assuming that KtCO2 is−40.03, against an increase of more than 29,000 in the other cells fol-lowing the Spanish deficit.

20 See Davis et al. (2011) for an analysis of how the flows of international trade of en-ergy products transfer virtual carbon from producing to consumer countries.21 These important environmental effects are behind the possible indirect carbonleakage that is generated when a country unilaterally implements stringent environ-mental legislation that aims to internalise the environmental costs of energy sectors;in fact, it represents an increase in their prices (Reinaud, 2008; Sijm et al., 2004).

0

500

1000

1500

2000

2500

3000

3500

4000

4500

BAE 1 BAE 2 BAE 3.1 BAE 3.2 BAE 1 BAE 2 BAE 3.1 BAE 3.2

Electric Power, Gas and Water Coke, refined petroleum products

Own exported emissions Emissions in direct input Emissions in indirect input

Fig. 1. BAE analysis by rows in energy products, 2005, KtCO2.Source: Own elaboration.

183L.A. López et al. / Energy Economics 39 (2013) 177–186

3.2. Balance of avoided emissions by columns (industries)

The columns or industries analysis provides information about thesectors responsible for the existence of PHH because that indicates insti-tutional agents/final demand or industries that import goods from bothcountries and therefore acquire virtual carbon directly and indirectly(Figs. 3 and 4). First, the set of imports includes imports that industriesmake (textiles, machinery and equipment) that are (more than 90%)intended to be consumed as final demand by the Spanish economy andnot as inputs. These results are consistent with those found by Peters etal. (2011) for international trade in non-energy intensive manufacturedproducts (textiles, electronics, furniture, cars) versus energy-intensive in-dustries (cement, steel, pulp and paper) that dominate the significant netemission transfers of CO2 emissions from non-Annex B to Annex-B coun-tries between 1990 and 2008 (non-energy accounting for 41% of thegrowth). These results are also consistent with the results of Jakob andMarschinski (2012) for China in 2004 that show that China's specialisa-tion in the production and export of more pollutant goods explains

0

500

1000

1500

2000

2500

BAE 1 BAE 2 BAE 3.1

BAE 3.2

BAE 1 BAE 2

Iron & steel Chem

Own exported emissions Emissions in

Fig. 2. BAE analysis by rows in inteSource: Own elaboration.

only 29% of its surplus in the emissions balance in 2004 with the rest ofthe world. In traditional or low-manufacturing industries, the textileindustry is remarkable with a PHH of 4612.54 KtCO2 non-avoided andmanufacturing n.e.c. & recycling has a PHH of 1875.89 KtCO2 non-avoided, whereas most imported goods satisfy final demand (BAE1).Spain has multinational companies in the textile sector (Inditex,Mango, and Camper) that are responsible for this virtual carbon becausethey lead the Spanish offshoring processes to low-wage countries andimport final goods.

The fourth sector in PHH importance is machinery and equipment,with a total of 2806.01 KtCO2 non-avoided that goes mainly to finaldemand, and the sixth is electrical machinery, with a PHH of 2174.96KtCO2. This PHH is significant because it represents most Chinese ex-ports to Spain and because of the indirect effects generated in the pro-duction processes in China; however, it is not significant that theseChinese industries possess highly inefficient pollution technologies. Inthese sectors of high technology, offshoring is important (Cadarso etal., 2008; Feenstra and Hanson, 1999) and the figures for Spain–China

BAE 3.1

BAE 3.2

BAE 1 BAE 2 BAE 3.1

BAE 3.2

icals Rubber & plastics products

direct input Emissions in indirect input

rmediate input, 2005, KtCO2.

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

BAE 1 BAE 2 BAE 3.1

BAE 3.2

BAE 1 BAE 2 BAE 3.1

BAE 3.2

BAE 1 BAE 2 BAE 3.1

BAE 3.2

Textiles, leather and footwear

Machinery & equipment Manufacturing nec, recycling

Own exported emissions Emissions in direct input Emissions in indirect input

Fig. 3. BAE analysis by columns in select sectors, 2005, KtCO2.Source: Own elaboration.

184 L.A. López et al. / Energy Economics 39 (2013) 177–186

trade present an important PHH. The Spanish economyhas not been ableto participate in global value chains in production of machinery or in in-dustries generating and attracting foreign capital; therefore, few importsas inputs are made between both countries. Thus, the impact in terms ofemissions is low. The responsibility of this virtual carbon falls on house-holds, public administration and industrial purchasers of investmentgoods.

The third sector in BAE importance is manufacture of transportequipment – although Spain specialises in its production – with a PHHof 3108.8 KtCO2 non-avoided emissions that go mainly to GVC, morespecifically as exports to the rest of the world (BAE3.i). This is theunique sector in Spain–China trade that is part of a GVC with a signifi-cant impact on the environment because Spain is a large importer ofiron and steel and rubber and plastics from China. These imports areprocessed in intermediate inputs (such as engines or rear viewmirrors)and in final goods (vehicles). In terms of international freight transport,the result is that this sector produces more emissions in the transporta-tion of goods than is generatedwhen the parts are assembled inside thecountry (Cadarso et al., 2010).

Construction is the second sector with higher PHH, 3662.7 KtCO2,which is helped by the sector size in Spain during those years (Bielsaand Duarte, 2011). The emissions are all devoted to the second BAEcomponent, that is, emissions embodied in imports of intermediategoods that attend to domestic demand (BAE2). The construction sec-tor is not trading internationally directly,22 but it is responsible forthe imports of inputs with high emissions coefficients (iron andsteel, 994 KtCO2, rubber and plastic, 360 KtCO2) and those intensivein the use of energy (electricity, 1062 KtCO2, Coke and refined petro-leum, 552 KtCO2).

4. Conclusions

The analysis of this paper shows that China has become a pollutionhaven for the Spanish economy. The balance of avoided emissions be-tween these two countries shows an increase of emissions of 29,667KtCO2 in 2005 because of the existence of international trade between

22 This statement is not entirely true because a large part of the sales of tourist hous-ing by foreign persons (mostly German and English) in the Spanish economy is consid-ered part of domestic demand, although these should be treated as exports in terms ofresponsibilities because they are purchased by non-residents.

the countries and an emissions balance with a negative sign for Spainof 40,105.3 KtCO2. In a world without international trade, each coun-try would have to produce its imports domestically and that wouldhave eliminated those 29,667 KtCO2. The high polluting intensity ofmost sectors of the Chinese economy compared to the Spanish sectors(electricity, Coke and refined petroleum products, in particular), theSpain–China trade deficit and the significant Chinese exports ofenergy-insensitive products (iron and steel, rubber and plastic andchemicals) initially explain the existence of the PHH.

The main contribution of this work is its methodology and the use ofthe data in a bi-regional context because this allowed us to differentiateour BAEmeasure by components, depending onwhether the goods trad-edwere final or intermediate and onwhether they attended to domesticfinal demand or were re-inserted in the GVC through exports. The dis-tinction of virtual carbon by own, direct input and indirect input andby rows and columns is useful in identifying the industries responsiblefor PHH through participation in domestic or global value chains.

The PHH by rows shows that only 5 of the 23 industries are consid-ered responsible for 82.2% of the increase of emissions embodied intrade between Spain and China in 2005, and the electricity industry ex-plains 30% of the total because of China's high intensity pollutant econ-omy that is caused by the massive use of coal in combination with thelow pollution intensity of the Spanish economy, mainly resulting fromits increasing use of renewable energy (wind power energy has risenfrom 8% in 2005 to 15.8% in 2010). This environmental responsibilitylies with the suppliers of energy products, electric power, gas andwater and Coke, petroleum products and nuclear fuels primarily in theChinese economy; these products are not traded between the countries.Only 3229 KtCO2 of 29,667 KtCO2 are linked directly to production com-panies engaged in exports and the rest is related to the indirect linkageeffects of virtual carbon. However, PHH concentration facilitates theadoption of mitigation policies because efforts must be focused ononly a segment of industries. Moreover, for the energy industries, it isnecessary to add iron and steel, rubber and plastics and chemicals be-cause a part of the GVC of these three industries is traded as inputmaterial.

The governments of developed and emerging countries are the insti-tutions that must implement policies focused on the energy sectors andenergy-intensive industries if they desire to reduce the impact of eco-nomic activity on the environment and therefore, acknowledge therisks associated with international trade in this regard. For instance, re-newable energy support programs in China are a way of reducing the

23 In this sense Atkinson et al. (2011) check how the costs of some imported productswould represent an 11.5% increase; however, these authors did not estimate howmuch the prices increase for industries that import inputs according to the use madeof these intermediate inputs.

0

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4000

BAE 1 BAE 2 BAE 3.1

BAE 3.2

BAE 1 BAE 2 BAE 3.1

BAE 3.2

BAE 1 BAE 2 BAE 3.1

BAE 3.2

Construction Manufacture of Transport Equipment

Electrical machinery & apparatus, nec

Own exported emissions Emissions in direct input Emissions in indirect input

Fig. 4. BAE analysis by columns in selects sectors, 2005, KtCO2.Source: Own elaboration.

185L.A. López et al. / Energy Economics 39 (2013) 177–186

weight of coal in the energy mix, and this would ultimately reduce theindirect effects of PHH (IEA, 2009). The development of carbon captureand storage technologieswould also help reduce the impact of emissionsfrom coal-fired power plants. However, the impact of international traderequires global environmental policies to be implemented based on acollaboration of the majority of the countries around the world, wherecommitments are set according to the criteria of “common but differen-tiated responsibility” that involve all agents that contribute to environ-mental damage through international trade. A criterion of consumer orshared responsibility could favour these agreements because it wouldreduce the commitments of emerging and developing countries as netexporters of pollution and increase the responsibility of developed coun-tries, such as Spain, who are net importers of pollution (Cadarso et al.,2012; Ferng, 2003; Gallego and Lenzen, 2005).

Given the absence of these agreements today, unilateral environ-mental policies taken by the EU involve the exemption of purchasingemissions allowances for industries at the risk of carbon leakage (Direc-tive 2009/29/CE) to facilitate keeping (at least) part of the productionand employment in the EU. In this sense, the methodology proposedis useful to assess the possibility of considering the differentiation be-tween inputs and final goods trade as an additional criterion to identifythese industries. A possibility would be to assign fewer free allowances(or subsidies) to those industries that have entirely outsourced theirproduction and to favour those industries that relocate fewer roundsof production and maintain more employment within the UE.

The PHHby columns (or sectors) indicates that textiles, constructionmaterials and transport industries are the main industries responsiblefor the increase in emissions as a result of international trade. In thiscase, the pattern of trade is different, textiles products goes to final de-mand, imported inputs by the construction sector goes to the last stageof production and inputs required by the transport industry are, in theend, finally re-exported to other countries. The identification of the in-dustries that import inputs and institutional agents that import finalgoods is also important because they are the decision makers relatedto the importation of certain goods that contribute to the deteriorationof the environment. The application of an eco-label in terms of CO2

emissions might help final consumers and importing industries to re-duce their environmental impact by buying more environmentallyfriendly products. Furthermore, a border tax over emissions to preventcarbon leakage in the EU might be established (Antimiani et al., 2013;

Atkinson et al., 2011; Böhringer et al., 2012).23 Because the PHH be-tween Spain–China ismainly explained by indirect effects, this indicatesthat a border taxwould consider total virtual carbon, direct and indirect,incorporated into imported goods, if we want to reduce the impact ofthis type of trade on the environment.

Acknowledgements

Wewould like to thank the Ministry of Economy and Competitive-ness for the funding of our research project, ECO2012-33341, whichhas resulted in this paper.

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