Interpreting China’s carbon flows

Feng et al. present an insightful analysis of China’s interregional carbon flows, using a consumption-based approach and multiple region input–output model (1). Their report shows convincingly that the production, consumption, and export of high-value goods and services in rich regions depend upon the emissions-intensive products from poorer regions in China, consistent with what has become clear about embodied carbon in international trade (1–3). As the authors write: “…the high standard of living enjoyed by people in the richest countries often comes at the expense of CO₂ emissions produced with technologies of low efficiency in less affluent, developing countries” (1). Their analysis demonstrates that, within China, more affluent coastal regions have “outsourced” large shares of their emissions to their less-developed counterparts inland. The implications, both positive and normative, must be seriously considered in domestic and international policymaking on climate, trade, and economic growth.

Efficiency, Equity, and Carbon Leakage

The first positive implication concerns the carbon efficiency of production patterns. When production relies upon inefficient technologies in less-developed countries and regions, it leaves unfulfilled potential toward the production possibilities frontier, which could be realized with better technologies existing in affluent countries and regions. Efficiency loss is often an inevitable side effect of globalization, as emissions are outsourced to less-developed nations because investors maximize capital returns on investment by taking advantage of low-cost labor, natural resources, and emissions space in developing countries, which tend to reduce global carbon productivity. This is a key tension between economic growth and environmental protection, actuated by the principle of comparative advantage in developing versus developed countries. For example, looking at data from 1997 to 2003, Shui and Harriss (4) show that United States–China trade has increased global carbon emissions by 720 million metric tons, compared with a situation absent their bilateral trade. The second positive implication of carbon outsourcing is carbon leakage (2). Developed nations can meet their mitigation targets by importing carbon-intensive goods from less-affluent trading partners, which results in an emissions increase in exporting countries, undermining global efforts to mitigate climate change (2).

The normative implication concerns equity loss when carbon is outsourced. Under the current international climate regime, producing countries shoulder the burden of embodied emissions for importing countries’ consumers (3). Moreover, the poorer exporting nations are vulnerable to being locked into a high-carbon model of growth with the intensification of trade patterns.

These implications seem to be applicable to both international and intranational trade. However, further scrutiny suggests that the drivers and rationale behind domestic carbon flows may differ from those of international trade, and thus an alternative interpretation is needed. There may not necessarily be an efficiency loss because of carbon outsourcing within China; in fact, there could be an efficiency gain. In the global economic system, some production factors, such as labor and technology, tend not to move freely across national borders because of various barriers, notably immigration restrictions and intellectual property rights protection. Thus, an optimal allocation of production factors (including labor, land, capital, energy, and technology) is unlikely to be achieved.

A key feature of China’s industrial production system is the spatial heterogeneity of production factors. The distribution of energy and other industrial resources does not match that of population centers and ports for trade. Energy and mineral resources are located inland but population and transportation hubs are strung along the coast (Fig. 1). As industrialization expands, many energy-intensive industries have been moving into the central and western regions to seek more efficient production, because energy and resources are located there. The resultant products and electricity are then transferred to the coastal regions for export, consumption, or further processing into higher-value goods. Thus, the spatial pattern of carbon flows shown in Feng et al. (1) can be interpreted as a result of the efficient specialization of industrial production aligned with China’s economic geography.

Fig. 1.

The geographic distribution of population centers and coal reserves, and the level of success in meeting 11th 5-y plan energy intensity targets by region. Sources: Coal reserves and population density from the National Bureau of Statistics, 2011; population density was calculated based on population and land area; energy intensity of eight regions is integrated based on provincial energy and gross Regional Product data (6).

There are essentially no barriers to technology transfer and labor movement within the country. The western, central, and northern regions have relative advantages in producing energy-intensive goods, and the eastern and southern regions have relative advantages in producing technology- and capital-intensive, high-value goods. Therefore, the geographical distribution of industries is a result of the specialization of industry, which in turn improves, rather than compromises, efficiency in resource utilization. In other words, there is an efficiency gain in the current structure of production.

Despite the apparent similarities in the pattern of carbon flows, carbon leakage works in some fundamentally different ways between international and domestic levels. Because carbon mitigation policies are applied across the board for all provinces in China, there is technically no carbon leakage among provinces as defined in international trade. However, some provinces, particularly along the coast, do have higher targets than their inland counterpart, and embodied carbon flows from provinces with lower targets to those with higher targets as a result of commodity flow. Therefore, carbon leakage exists in a relative sense. Moreover, relocation of carbon-intensive industries to less-developed regions often helps to improve the carbon productivity in the destined provinces. The resultant carbon outsourcing of this kind helps achieve targets for both sides, but may not meet the national target as a whole, which is perhaps the most common form of carbon leakage in the case of China (5).

Finally, equity loss is of minor concern regarding carbon outsourcing within China. Under the current climate regime, equity is primarily an issue among nations but not within national borders. Nonetheless, Chinese policy addresses interregional inequity by mandating higher targets for more-developed provinces and lower targets for less-developed provinces. In addition, the central government allocates greater financial support to the latter to help them meet their goals. This finding is in line with China's political-economic logic to address geographic disparities in development.

Policy Implications of Carbon “Outsourcing”

Feng et al. (1) are concerned with the ramifications of carbon outsourcing for China’s climate-change mitigation policy. In reaction to the differing energy and carbon intensity reduction targets assigned to coastal and inland provinces, the authors argue that “provinces in the central and western parts of China will struggle to achieve even these more modest reduction targets” because of the existing pattern of carbon outsourcing. Approximately 45% of carbon embodied in trade was concentrated in the small Central Coast region, which contains a little over 2% of China's land area (6). A similar dynamic characterizes the South Coast region. In fact, during the 11th 5-y plan period, western provinces, such as Inner Mongolia and Shanxi, exceeded their eastern counterparts in meeting energy intensity reduction targets (Fig. 1).

Considering the issues around efficiency and equity and assuming that the marginal cost of abatement for western provinces is greater than that for eastern provinces, Feng et al. (1) support a national emissions trading scheme with a uniform carbon price. However, in order for emissions trading scheme to alleviate carbon leakage, strict caps must be assigned to all provinces, which in turn may further enlarge the equity gap between regions if done inappropriately. In addition, the assumed lower marginal cost of abatement must be supported by more rigorous analysis.

In fact, the current intensity-based policy does not necessarily exacerbate carbon leakage, because carbon outsourcing has not played a significant role for meeting the mandated targets of provinces. Carbon intensity is expressed as carbon emission per unit of gross domestic product, and thus provides multiple avenues for reduction (e.g., through accelerating growth or lowering carbon emissions). The main measures used so far by provinces have focused on closure of inefficient industrial facilities in exchange for greater capacity of production, as well as improvement of key technologies for higher energy efficiency. Carbon outsourcing as studied in Feng et al. (1) usually takes place as energy-intensive industries are transferred to poorer provinces inland, in pursuit of economic efficiency rather than for meeting carbon mitigation targets (5). Thus, the intensity-based policy does not directly worsen the pattern of carbon outsourcing.

Who Bears the Responsibility?

Nonetheless, we are in full assent with Feng et al.’s (1) conclusion that “[c]onsumption-based accounting can thus inform effective and equitable policies to reduce Chinese CO₂ emissions.” Consumption-based accounting helps nudge the policy consensus away from the “producer pays principle” to the “consumer pays principle.” This alternative approach helps to highlight and quantify consumer responsibility. Approaching the problem of “outsourcing” from this perspective, and using the analysis of Feng et al. (1), we can draw another important policy implication not enumerated by the authors.

The study concludes that 57% of carbon was outsourced within China, but as Yan and Yang (7) show, of that amount 26.54% was exported, which means only 30% of emissions remained within domestic circulation. The Central and South Coasts, as well as the Beijing-Tianjin region, although the recipients of large flows of embodied carbon, also serve as the manufacturing and exporting hubs of goods consumed overseas. Although domestic outsourcing is a significant phenomenon, the effects of international trade account for nearly half of out-of-region carbon production. Thus, consumers in the affluent coastal regions should bear greater responsibility (and costs) of carbon emissions, but international consumers should also bear major responsibility (8). By acknowledging this fact, the equity implications of Feng et al.’s (1) analysis of China’s outsourced carbon are more complete and instructive.