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Massive Trade Loophole Places 25% of Global Emissions Outside National Climate Plans

A massive and growing “carbon loophole” is undermining global efforts to bring greenhouse gas emissions under control, with “most types of carbon policy” failing to account for the imported goods that represent about one-quarter of the global carbon footprint, according to a new report sponsored by the ClimateWorks Foundation.

China was the point of origin for four of the five largest exports of embodied carbon in 2015, the report concludes. Canadian exports to the United States placed fourth, at more than 125 million tonnes of carbon dioxide.

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“It’s a huge problem,” said study co-author and Global Efficiency Intelligence CEO Ali Hasanbeigi. “If a country is meeting its climate goals by outsourcing emissions elsewhere, then we’re not making as much progress as we thought.”

The study concludes that rich countries in North America and Europe are reducing their domestic greenhouse gas emissions on paper by “outsourcing” a large share of their carbon pollution overseas. That means “importing more steel, cement, and other goods from factories in China and other places, rather than producing it domestically,” the New York Times explains.

The research confirms earlier reports “that around one-quarter of global CO2 emissions are embodied in imported goods, thus escaping attribution in the consuming country (the end user) and instead being debited at the producer side,” states the report, produced by Hasanbeigi’s firm along with ClimateWorks and KGM & Associates. “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 report cites the history of global air pollution controls as a “worrying example” of what might be ahead: “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.”

In fact, the gap between promise and performance has already shown up under a past international climate agreement. Under the Kyoto Protocol, “countries have reported reductions that exceeded their Kyoto targets, however, the changes in emissions embodied in imports are comparable to or larger than changes in domestic emissions,” the report states. “Unless consumption-based accounting is used, countries may continue to export their emissions to meet their Paris Agreement targets.”

The report singles out the United States as the largest importer and China as the largest exporter of embodied carbon, but notes that “many other countries are involved” in the global carbon trade. “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 as notable net importers of embodied CO2.”

The research points to steel and cement is two particular products that “stand out as heavily traded and carbon-intensive”—in other words, the “emissions-intensive trade-exposed” industries that tend to receive special treatment under initiatives like the pan-Canadian climate plan.

The report also points to a doubling in emissions exports/imports among countries in the developing South since 2000. “This reflects the emergence of a new phase of globalization in which some production is relocating from China to other countries, particularly production of raw materials and intermediate goods such as mining and chemical products,” it states. The authors predict that the carbon loophole will expand as national carbon policies come into effect, given major differences in carbon efficiency among countries.

“Just as China’s starting to deal with its emissions, it’s been pushing some of its more carbon-intensive activities into countries like Cambodia, Vietnam, and India,” University of California, Irvine scientist Steven J. Davis told the Times, based on his own related study in the journal Nature Communications. “From a climate policy context,” he said, “it’s like a game of whack-a-mole.”

“The carbon efficiency of production for specific product and service groups varies widely across sectors and across countries,” the report states, with the same sector in different countries showing up to a tenfold difference in emissions. That difference could fuel a race to the bottom, with companies pursuing the “opportunity and economic incentive” to dodge carbon regulations.

“While it is true that carbon costs are a small portion of the total cost structure for most industries, nevertheless as the costs of emitting carbon rise in certain countries and are left unaccounted for in others, it can be expected that businesses make decisions about production and sourcing as those costs rise at the margin.”

The report calls for better emissions tracking and “stronger institutional support from national statistical offices” to get a massive international problem under control. “Measurement is the first step towards management, and data collection can enable informed policy decisions,” it states. “Monitoring can allow the establishment of a baseline from which to assess whether introduced policies are benefiting or undermining a country’s consumption-based carbon profile.”

The Times report on the study outlines some of the other emerging responses to the carbon loophole. “One possible solution to all this emissions shifting would be for all countries to work together to enact a global carbon tax that applied equally everywhere,” writes climate specialist Brad Plumer. “But in the real world, that is unlikely to happen anytime soon.”

But California and Washington State have enacted Buy Clean laws, while the U.S. Green Building Council is encouraging environmental disclosures for building materials like cement and glass. “California can’t go regulate factories in other parts of the world,” said U.S. Sierra Club California Director Kathryn Phillips. “But we can say, if you want to do business with us, the world’s fifth-largest economy, you have to do what you can to reduce emissions.”