The Impact of Direct and Indirect COVID-19 Related Demand Shocks on Sectoral CO2 Emissions

What is it about?

COVID-19's demand shocks have a significant impact on global CO2 emissions. We estimated the impact of COVID-19's direct and indirect demand shocks on CO2 emissions in the Asia-Pacific countries of Bangladesh, China, India, Indonesia, and Pakistan (BCIIP). We demonstrated that direct demand shocks, with a negative 85%–63% share, were responsible for the majority of the reduction in CO2 emissions. The downstream indirect demand contributed only 15%–37% to the reduction of CO2 emissions. Given BCIIP's current economic recovery, a CO2 emissions reduction of less than 1% is more likely in the coming years.

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Photo by Arie Wubben on Unsplash

Photo by Arie Wubben on Unsplash

Why is it important?

Despite the fact that significant work has been done in general on COVID-19-related impacts on supply chain and production activities, as well as CO2 emissions, much re-search has focused on sectoral environmental and carbon linkages. However, the following significant research gaps remain in the related literature. (1) The literature on COVID-19-related general economic activities and CO2 emission reductions does not usually divide total demand shocks into direct and indirect demand shocks. (2) The literature on the impact of COVID-19 on economic activities in general, and CO2 reductions in particular, does not typically classify the role of domestic intermediate sectoral supply chain disruptions based on the influence of direct and indirect demand shocks. (3) Traditionally, the literature on sectoral environmental and carbon linkages does not take into account the effects of direct and indirect demand shocks on intermediate sectoral linkages. (4) The case of the majority of BCIIP countries, with the exception of China, under COVID-19-related CO2 reductions has largely gone unstudied in the related literature. This study addresses the aforementioned research gaps in the following ways. First, our study disaggregates COVID-19-demand-shock-related impacts into direct and indirect demand shock impacts within an economy, which are rarely investigated in the related literature (A sector’s direct CO2 emissions can be further subdivided into internal and forward (downstream) emissions. Current assessments of COVID-19’s impact on CO2 emissions overlook a critical factor: the extent to which indirect demand from other sectors can help a sector reduce its CO2 emissions, particularly when their demand is influenced by unexpected demand shocks such as the ongoing disaster of COVID-19). Second, the study categorizes intermediate sectoral supply chain disruptions based on the direct and indirect effects of sectoral final demand. These are not normally classified in both the general literature on sectoral environmental linkages and the COVID-19 economic and environmental impacts literature (Where a target sector’s internal linkages are driven by their own demand, which means their value is directly dependent on their own final demand value or demand shocks. However, forward, or downstream linkages, are more complicated, as they are not driven by a sector’s own demand but rather by the demand of the sector’s downstream importing sectors. As a result, these forward CO2 linkages depict the effect of indirect industrial demand on a sector’s CO2 emissions). Third, this study modifies the MHEM approach and introduces the impact of COVID-19-related direct and indirect demand shocks on intermediate sectoral linkages. Fourth, this study estimates the impact of COVID-19’s direct and indirect demand shocks on CO2 emissions in the major developing Asian economies of Bangladesh, China, India, Indonesia, and Pakistan (BCIIP) using the single regional input–output model (SRIO) and the Asian Development Bank’s (ADB) COVID-19 economic impact scenarios. COVID-19 has had the greatest impact on developing economies. BCIIP countries are interesting cases not only because they are among the most important developing economies, but also because they are among the most populated, with approximately 45% of the world’s population residing in BCIIP, and from an environmental standpoint, they are among the most polluted nations. The estimation of COVID-19 pandemic effects on the world’s most populated and polluted developing region can not only help with this region’s future carbon policy but also serve as a model for other countries. Second, by estimating the effects of demand shocks on inter- and intra-sectoral CO2 linkages, this study advances sectoral linkage estimation methods, particularly the HEM. Third, the study clarifies the concept of direct and indirect demand and demand shocks in the context of a country’s domestic economy.

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