The intersection of trade and climate change is becoming increasingly critical amid geopolitical tensions, economic competition and the urgency of decarbonization. As major economies implement trade and climate policies, fragmented regulations aggravate concerns over competitiveness, carbon leakage and interoperability in global value chains. In this context, understanding the scale of emissions embedded in trade is key.
What are emissions embedded in trade?
Emissions embedded in trade are all greenhouse gas (GHG) emissions that are generated to produce internationally traded goods.
Typically, climate discussions focus on countries emissions, and there are two ways to go about measuring these. The most mainstream approach – production-based – consists in attributing GHG emissions to countries in relation to their production, i.e. accounting for the actual GHG emissions occurring inside the countries’ boundaries. This production-based approach does not require the concept of emissions embedded in trade, since only territorial emissions are considered.
Another approach is to attribute GHG emissions in relation to their final consumption – to account for all GHG emissions that the production of goods consumed by the country’s population has generated around the globe. This consumption-based approach requires accounting for all foreign emissions that have been necessary to the production of goods consumed by the country. This is where the concept of emissions embedded in trade, or “imported emissions”, appears useful.
In some places, countries have rules requiring product-level emissions footprints, which may also require understanding supply chain emissions – although these can be hard to measure. Emissions may also be imported in non-industrial items like agri-food items – though these come with their own measurement considerations.
Imported emissions are a crucial indicator to follow, especially when one country’s emissions reduction at home could lead to an increase in emissions abroad, as domestic output is substituted by imports. Consumption-based emissions monitoring enables preventing and managing the risks of carbon leakage.
How big are these emissions?
Emissions embedded in trade account for 23% of all global emissions. This means that about one quarter of all global emissions are generated by countries to fulfil the final consumption of other countries, highlighting the strong climate co-dependence between our economies.
The G20 represents the lion’s share of traded emissions. Traded emissions from, to and between G20 countries account for 80% of all traded emissions, which underlines the strong decarbonization potential of ambitious trade-related climate measures in these countries.
How exactly do you measure emissions in trade?
Emissions embedded in trade are usually calculated using statistical methods. The most widespread approach is using multi-regional input-output models (MRIOs) that combine input-output tables (IOTs) with air emissions accounts (AEA). Input-output tables provide a mapping of the sale and purchase relationships between producing and consuming countries within an economy, in monetary value. Air emissions accounts provide climate-related data on the GHG intensity of economic activities within producing countries. By cross-referencing both sources, it is possible to produce a global database that tracks, for a given country, all emissions generated by sectors and sub-sectors abroad to fulfil the final consumption of this country.
The most well-known environmental input-output models are the FIGARO environmental dataset provided by Eurostat and the EXIOBASE database. The OECD’s Inter-Country Input-Output database, combined with air emissions accounts, also provides such data on imported and exported emissions between the main global economies.
Evidently, multiple approaches exist to track embedded emissions. For instance, another approach for calculating embedded emissions is the use of life-cycle assessment methods (LCAs), which evaluate emissions through a product’s entire life cycle. This method is more product-specific and accurate than MRIOs, but less scalable for national-level analysis.
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How are these emissions currently addressed in trade policy?
Under current global climate arrangements, countries primarily report production-based emissions, while consumption-based emissions receive little attention. Targets exist for reducing production-based emissions, but nations have not established reduction goals for emissions embedded in traded goods. As a result, carbon emissions have been addressed primarily through domestic policies rather than trade policies.
However, as countries began considering capping production-based emissions, two related concerns arose. Stakeholders flagged the risk of local manufacturers relocating to countries with less stringent policies to avoid higher compliance costs, a phenomenon known as carbon leakage. Equally, stakeholders worried that compliant industries would face unfair competition from imports from jurisdictions with weaker emissions regulations. Border carbon adjustments (BCAs) have emerged in response. Here's how some countries have responded:
• The EU has pioneered this tool with the Carbon Border Adjustment Mechanism (CBAM) linked to its Emissions Trading System (ETS). The EU CBAM is currently in its transitional phase, requiring importers to report embedded emissions, before financial charges come into effect.
• The UK, after Brexit, announced its own CBAM, which should come into force in 2027. The UK’s CBAM differs from the EU model in several ways, including its pricing mechanism and scope, with the UK adding glass and ceramics, but excluding electricity.
• Australia has historically resisted carbon pricing. However, the Australian government has recently begun exploring these pathways, including border carbon adjustment measures.
• Canada has a well-established carbon pricing system and faces a high risk of carbon leakage by 2030. Canada has assessed the idea of a border carbon adjustment.
• In the US, although there is no federal carbon tax or cap-and-trade system in place, Congress has been considering imposing a fee or tariff on imported emissions. In the past two years, at least seven bills were introduced with different scopes and methodologies.
In short, there is a growing trend towards trade policies focused on consumption-based emissions, often attempting to mirror domestic production-based carbon pricing approaches, which vary not only in scope and measurement methods for pricing but also in reporting, verification and certification.
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What more can be done to tackle emissions in trade?
The global trading system is under great strain. Different approaches to carbon tariffs are likely to stoke trade tensions, in turn braking growth.
While a fully harmonized global carbon system is unlikely, interoperability presents a practical path forward for tackling emissions embedded in trade. That means countries work to harmonize where possible and recognize equivalent policy outcomes. Policymaker exchange is needed on emissions reporting templates, units of measurement, emissions categories, among others. Some governments have already struck mutual recognition agreements to accept the other’s emissions calculation methodologies as equivalent.
Certain countries may choose to advance “climate clubs.” A notable example was the Global Arrangement on Sustainable Steel and Aluminum under which the US and the EU attempted to align their procedures to measure emissions in these sectors.
Multilaterally, the WTO has played a valuable role in fostering cooperation, as demonstrated by its leadership in the Steel Standards Principles. However, it lacks technical depth and enforcement mechanisms. Given that the WTO is not a standard-setting body, it needs co-conveners with stronger technical expertise to drive more detailed and actionable frameworks.
Finally, another important consideration is the phenomenon of carbon shuffling, in which high-emission exporters redirect their products to different markets. Rather than reducing overall emissions, border measures may simply alter trade flows, with cleaner exports being sent to countries with imported emissions measures while more carbon-intensive goods are diverted to markets without such regulations.
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