Author: Ali Hasanbeigi, Ph.D.
The carbon loophole refers to the embodied greenhouse gas (GHG) emissions associated with production of goods that are ultimately traded across countries. These emissions are a growing issue for global efforts to decarbonize the world economy. Embodied emissions in trade are not accounted for in current GHG accounting systems. If they were, many promising climate trends would be negated or reversed.
These embodied flows of carbon, which are not accounted for in production-based or territorial emissions accounting are responsible for around 25% of the global carbon emissions (Hasanbeigi et al. 2018).
President Biden announced a new target for the United States to achieve a 50-52 percent reduction from 2005 levels in economy-wide net GHG pollution in 2030. Many other countries have in fact committed to becoming carbon neutral by 2050, including major GHG emitters such as Britain, Japan and South Korea. China which emits more than a quarter of world’s GHG emissions set a 2060 carbon neutrality target.
Most of these commitments are focused on domestic GHG emissions generated within the country (also known as production-based or territorial emissions). When goods are traded, the emissions associated with their production (or embodied emissions) are also traded, and these emissions for imported goods are not counted towards the consumer country’s emissions reporting and GHG reduction targets. Many argue that these accounts should be corrected to account for emissions embodied in imported goods, also called consumption-based accounting.
Recent studies have shown that, when using consumption-based accounting, the apparent progress among developed countries in reducing their emissions is actually negated or reversed due to import of embodied emissions into developing countries. Accordingly, substantial share of the increase in emissions in some developing countries can be attributed to production for export to developed countries. For example, UK and the U.S. are net imported of embodied emissions and China is net exporter of embodied emissions as a whole.
While all these newly announced carbon neutrality targets by countries and corporations are encouraging and a step into a right direction, it is extremely important that accurate “consumption-based” accounting is used by countries to assess their GHG reduction in order to avoid carbon leakage. The carbon leakage refers to the situation when countries or companies simply outsourcing the production of carbon-intensive materials to other countries usually with less strict environmental standards and then importing those goods without accounting for embodied GHG emissions of the imparted products.
If the countries with carbon neutrality targets do not pay attention to the Carbon Loophole and do not use consumption-based accounting, their achievement of carbon reduction goals will have much less actual positive impact than claimed and may even in some cases result in an overall increase in global GHG emissions.
For example, producing one ton of steel in the U.S. emits less than half a carbon emission compared to producing a ton of steel in China (Hasanbeigi and Springer 2019). So, if the U.S. outsources parts of its steel or steel products production to China in the future in order to reduce its domestic GHG emissions, it will actually result in an increase in global GHG emissions.
The same concept discussed above also applies to corporations and their carbon neutrality targets. If corporation do not count the carbon emissions across their value chain and the embodied carbon in materials they use (scope 3 carbon emissions), their carbon neutrality target has far less impact than claimed.
To learn more about the Carbon Loophole see our reports, “The Carbon Loophole in Climate Policy- Quantifying the Embodied Carbon in Traded Products”.
To learn more about the embodied carbon in U.S. manufacturing and trade, see our recent report, “Embodied Carbon In The U.S. Manufacturing And Trade”.
To learn more about the GHG emissions of steel industry across countries, see our report, “How Clean is the U.S. Steel Industry? - An International Benchmarking of Energy and CO2 Intensities”.
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