Consumer pulled industrial carbon emissions

What is it about?

Production-based and consumption-based accounting techniques are widely used to assign responsibility for carbon emissions. No matter which approach is used, i.e. with or without endogenized capital, to estimate the final demand embedded carbon emissions, the fact remains that the available literature does not present the embedded emissions of the final consumers. One might ask why? The answer is that trade, i.e. imports in the case of consumption-based and exports in the case of production-based emissions, are not actual (real) consumers. This means that the final imports or exports are eventually consumed by households and the government. Simply put, apart from households and government, there is no final demand category that falls within the definition of the actual final consumer, i.e. capital formation and trade (import or export) are simply not consumers themselves, but are themselves consumed by final consumers like households and governments. Thus, the current literature actually underestimates the carbon emissions (carbon footprint) of final consumers. The literature on embedded carbon emissions with endogenized capital formation only solves the problem of the productive nature of capital formation by treating it as an intermediate production sector and incorporating its emissions into final consumption (household and government) and trade (imports or exports). But it fails to answer the question as to who is ultimately responsible for emissions from trade. This study solves this problem by integrating (endogenizing) carbon emissions from both capital formation and trade (imports) into the embedded carbon emissions of final consumers who are the ultimate (beneficiaries) of all economic activities.

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Photo by CJ Infantino on Unsplash

Photo by CJ Infantino on Unsplash

Why is it important?

The allocation of carbon footprints related to the entire consumption-based economic activity of a given nation or region to the actual final consumers (beneficiaries) of carbon emissions can enable us to determine which final consumer holistic and industrial (sectoral) demand imposes a net carbon externality on other final consumers. The net embedded carbon externality presents both the holistic and the sectoral-level differences between the embedded carbon emissions of different final consumers. Normally, carbon taxes (or the price of a carbon permit) are paid either directly by the industry or by the consumer (Cornwell and Creedy, 1996). However, no matter who pays those carbon taxes or permit prices, the cost of the product or service to the final consumer ultimately increases (Cornwell and Creedy, 1996). This, on the other hand, generates revenue for the government. So, no matter who has a net externality, carbon taxes always generate revenue for governments in one way or another, while household consumers always end up paying higher prices. One might ask that the government also pay those additional prices when contracting or spending on different products or services directly in terms of higher fuel prices and indirectly in the case of finished goods. But, looking deeper, this argument seems to be flawed because the additional price paid is actually government revenue at the same time, so no matter how high carbon taxes become, they will ultimately have zero net negative impact on government spending. Government revenue, on the other hand, is being increased by carbon taxes paid by consumers and industry. This means that, under the current mechanism, the government is not affected by carbon taxes, which could hinder the government's own environmental responsibility. But if the government is going to have to pay back to households where they are suffering from the government's net carbon externality, just as they are going to pay carbon taxes to the government, then it can ensure a more just carbon accountability mechanism between households and government. On the other hand, different types of households impose net carbon externalities through their consumption of different types of goods and services. For example, Chinese urban household indirect carbon emissions from electricity consumption are usually higher than those from rural household consumption. In this case, the urban household places a net carbon externality on rural households from their electricity consumption. However, both rural and urban households pay electricity charges equally. These factors show that there is a lack of a fair and effective policy to address final consumers' carbon emissions. This is mainly due to the fact that the available so-called consumption-based approaches have not reduced the embedded emissions to end-use consumer emissions. The result is the lack of any practical policy solutions aimed at real consumers of industrial emissions. All these issues and practical policy options on the basis of final consumer emissions are discussed in the course of this paper. The authors have selected a comprehensive 139 sector input-output table to present the end-use embedded emissions from the Chinese government and urban and rural households and the net carbon externalities imposed by these end-use categories on one another. The presentation of actual final consumer embedded emissions and CO2 externalities can help the world’s largest producer and consumer of carbon emissions to effectively and justly curb its carbon emissions by targeting the actual consumer of these emissions. Other nations and regions can also benefit from the concept of final consumer embedded carbon emissions and net embedded carbon externalities to justly and effectively mitigate their carbon emissions by targeting the ultimate users of these emissions. The study can also be used as a reference for new research on the subject of industrial consumption embedded emissions. References: Cornwell, A., Creedy, J., 1996. Carbon Taxation, Prices and Inequality in Australia. Fisc. Stud. 17, 21–38.

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