Is International Sourcing bad for Climate Change?

10/18/2016 06:46 pm ET Updated Oct 19, 2016

As the Paris Agreement on climate change is being signed by the global economic powerhouses, there is another major international agreement that is waiting for ratification: the Trans-Pacific Partnership or TPP. This new international trade agreement was supported by the countries around the Pacific-Rim that cover about 40 percent of the global GDP. But even without the presence of TPP, international trade is already one of the most conspicuous aspects of today’s global economy. Since the early nineties, the volume of international trade grew at around 7% a year on average, which is faster than either population (1.5%) or global GDP (3.7%).

The trouble is that international trade is often perceived as bad for climate change. Researchers writing peer-reviewed scholarly literature too often describe international trade as a “driver” of global carbon emissions [see e.g., 1].

But does the scientific evidence support this view?

Over the past five to six years, a body of literature has shown convincingly that greenhouse gas (GHG) emissions associated with international trade have increased dramatically [see e.g., 2, 3]. That’s important, but on its own, such a finding does not prove that international sourcing exacerbates climate change. Since international trade also boomed during the same period, it is not surprising to see a corresponding increase in carbon emissions from trade.

To prove any causal relationship, one would ideally need multiple worlds. One could then divide them into two randomly selected groups, and let one of the two trade freely, while completely banning international trade in the other. After, say, ten years, we could observe which group ended up with a higher global mean temperature rise. Easy enough.

Needless to say, such an experiment is far from practical. Perhaps that’s why a report commissioned by the World Trade Organization and the United Nations Environmental Programme titled “Trade and Climate Change” essentially came to the conclusion that the relationship between the two is complicated. The report laid out three “effects” of trade on climate change — scale, composition, and technique — without attempting to quantify their contributions to climate change.

That’s where Dr. Rutger Hoekstra (Central Bureau of Statistics, the Netherlands), Dr. Bernhard Michel (Federal Planning Bureau, Belgium), and I (University of California, Santa Barbara) started. We grouped nations into low-, medium-, and high-wage countries and analyzed the data for economic transactions and CO2 emissions from 1995 to 2007 — before the global financial crisis disrupted international trade patterns. During that period, the global economy added 7.4 gigatons (Gt) of CO2 into the atmosphere. We attributed the 7.4 Gt of global CO2 emissions increase to changes in such underlying factors as volume and composition of global consumption, carbon intensity, and sourcing patterns among the three groups. The results were recently published in a peer-reviewed journal [4].

We found that during the 12-year period, about 18 percent of the increase in global CO2 emissions were attributable to the changes in sourcing from domestic to foreign suppliers. This amount is roughly equal to the annual CO2 emissions of Japan. This includes the CO2 emissions associated with the additional transportation needs for international sourcing, which was only a minor component.

Changes in CO2 emissions due to the changes in sourcing patterns in Mt of CO2 between 1995 and 2007 ('ECS' stands for 'Emissi
Hoekstra, Michel, Suh (2016)
Changes in CO2 emissions due to the changes in sourcing patterns in Mt of CO2 between 1995 and 2007 ('ECS' stands for 'Emission Cost of Sourcing', which is the sum of the changes in all three groups)

The majority of the increase was associated with changes in sourcing patterns of high-wage countries. In particular, decisions made by those countries to purchase from suppliers in low-wage countries instead of from domestic suppliers have a twofold effect on CO2 emissions: first, they reduce emissions within the high-wage countries, which is shown in blue in the graph above, simply because they produce less. But they also increase emissions of low-wage countries, which is shown in green in the same graph. That’s bad news not only for low-wage countries but also for the whole world, because the CO2 emissions in low-wage countries due to the sourcing decisions from high-wage countries grew by an amount greater than the reduction in GHG emissions among high-wage countries.

The reason is simple: for the same dollar-worth goods produced, low-wage countries emit more CO2. In other words, the carbon intensity of production is higher among low-wage countries. Therefore, replacing domestically supplied goods and services in high-wage countries with foreign-supplied goods from low-wage countries in general generates more CO2 per dollar at the global scale.

So is international trade bad for climate change? According to our findings, international trade did contribute to increasing global CO2 emissions, so the simple answer has to be yes.

But the 18-percent figure is interesting. It is certainly not negligible, but it is also not dominating, either. The most important factor by far driving the escalation of global CO2 emissions during the period of study was economic growth. This complicates the story even further, because international trade, to a certain extent, is coupled with economic growth: international trade promotes economic efficiency and growth, which, in turn, leads to more trade, and so on. This mutual influence between trade and growth is much more complicated than what we could capture in our analysis and deserves further research.

Is there anything that can be done to mitigate the carbon costs of international sourcing? When assessing sourcing options, organizations should evaluate, and, if possible, avoid the additional carbon costs of sourcing from carbon intensive economies. Organizations, however, may find no other viable options but sourcing from carbon intensive economies. Even if that’s the case, the additional carbon costs can still be reduced or even completely negated through other mitigation measures. For example, organizations may consider installing capacity for generating renewable energy to offset the carbon costs of international sourcing.

Does that sound like a stretch? Well, some companies have already begun this process. Apple Inc., for example, launched a 40-megawatt solar project in China last year, which will certainly help mitigate their contributions to climate change associated with international sourcing [5].

This means that there are less drastic and potentially more effective solutions to climate change than abandoning international sourcing and trade altogether.

What are other options for mitigating carbon cost of international sourcing? Please feel free to share your ideas and comments using the “Comments” function below.
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