International trade has a significant impact on greenhouse gas (GHG) emissions and global climate change. In this respect, trade between China and the European Union, as the world’s two biggest exporters, is critical to the global GHG emission reduction efforts. The EU-15 is committed to reducing its CO2 emissions under the Kyoto Protocol. However, if the EU reaches its pledged targets by importing CO2 intensive products from China, thereby effectively outsourcing its own emissions to an extent of ca 13.6% of EU’s total energy-related CO2 emissions (2006/7); this hollows out and counters the spirit of the EU’s reduction commitment. The paper analyzes CO2 emissions embodied in China-EU trade from 1995-2006. CO2 emissions embodied in China’s exports to the EU and in the EU’s exports to China were highly imbalanced. The CO2 emissions embodied in China’s exports to the EU were 95.04 Mt in 1995 and 532.35 Mt in 2006, accounting for 2.99% and 8.85 % of China’s CO2 emissions respectively. On the other hand, those of the EU’s exports to China were only 5.78 Mt in 1995 and 26.05Mt in 2006, accounting for only 0.17% and 0.73% of the EU’s emissions respectively. The paper also shows that the scale effect caused the increase of emissions embodied in China’s exports to the EU, while the technology effect and the composition effect offset some of the increases. In terms of sectoral composition, the exports from China to the EU in “fabricated metal products, machinery and equipment”, “basic metals and other non-metallic mineral products”, “rubber, plastics products, and other manufacturing” and “chemicals and chemical products” accounted for a substantial proportion of China’s trade-embodied emissions. The paper concludes that the present trend is unsustainable and leads to ever-increasing trade distortions with environmentally counter-productive incentives. Policy responses are needed, first and foremost a continual carbon footprint accounting system between the EU and China. Finally three policy options to gradually lower imbalances and distortions are outlined.

Yunfeng Yan, Laike Yang, Jan Priewe

Published in Berlin Working Papers on Money, Finance, Trade and Development, June 2011