Im­pact Se­ries: 01-23

The Green Comparative Advantage:
Fighting Climate Change through Trade


In this Kühne Impact Series, we continue our effort to understand the role of international trade in the fight against climate change. Our main contribution is to introduce the concepts of environmental comparative advantage and environmental gains from trade. Our main point is that the environmental gains from trade are large so that trade plays a crucial role in the fight against climate change.

Full Article

Many con­sid­er in­ter­na­tion­al trade as one of the lead­ing caus­es of cli­mate change be­cause of the green­house gas (GHG) emis­sions gen­er­at­ed by the trans­porta­tion of goods across the plan­et. It is com­mon­ly ac­cept­ed that it is bet­ter to con­sume lo­cal­ly pro­duced goods in or­der to be en­vi­ron­men­tal­ly con­scious.

At the Kühne Cen­ter for Sus­tain­able Trade and Lo­gis­tics, we have come to op­pose this view and ad­vo­cate for a vi­sion of in­ter­na­tion­al trade as a so­lu­tion to rather than a cause of cli­mate change. Sev­er­al of our Kühne Im­pact Se­ries demon­strate that buy­ing green does not nec­es­sar­i­ly im­ply to buy lo­cal.1

Just as there are eco­nom­ic gains from trade if coun­tries spe­cial­ize in what they are rel­a­tive­ly good at — that is, ac­cord­ing to their eco­nom­ic com­par­a­tive ad­van­tage — sim­i­lar­ly there are en­vi­ron­men­tal gains from trade if coun­tries spe­cial­ize in what they are rel­a­tive­ly green at — that is, ac­cord­ing to their en­vi­ron­men­tal com­par­a­tive ad­van­tage.

A cru­cial dif­fer­ence, how­ev­er, is that the eco­nom­ic gains from trade emerge nat­u­ral­ly as the out­come of mar­ket forces, where­as the en­vi­ron­men­tal gains from trade ma­te­ri­al­ize only with the right poli­cies in place, such as a car­bon tax. This is be­cause the so­cial costs of GHG emis­sions far ex­ceed the pri­vate costs with­out ap­pro­pri­ate poli­cies in place.

To quan­ti­fy the po­ten­tial en­vi­ron­men­tal gains from trade, we de­vel­op a quan­ti­ta­tive mod­el of in­ter­na­tion­al trade and pro­duc­tion and sim­u­late a world econ­o­my where car­bon is taxed glob­al­ly and uni­form­ly. We de­com­pose the re­sult­ing emis­sions re­duc­tion into three ef­fects: a scale ef­fect, a com­po­si­tion ef­fect, and a green sourc­ing ef­fect. While the scale ef­fect and the com­po­si­tion ef­fect also arise in a closed econ­o­my, the green sourc­ing ef­fect is in­her­ent­ly about in­ter­na­tion­al trade and cap­tures the en­vi­ron­men­tal gains from trade.

We find that a uni­form glob­al car­bon tax is a re­mark­ably ef­fi­cient tool to re­duce GHG emis­sions: a tax of $100/tCO2 would re­duce cur­rent emis­sions by 27.5% while re­duc­ing gross out­put by only 2.6% and real in­come by a mere 0.7%. Our main re­sult is that 36% of this re­duc­tion in GHG emis­sions is achieved by lever­ag­ing the en­vi­ron­men­tal gains from trade.

The green sourcing potential of international trade can be achieved when countries specialize in their environmental comparative advantage

When ac­count­ing for the car­bon emis­sions of both pro­duc­tion and trans­porta­tion as­so­ci­at­ed with trad­able goods and ser­vices, it be­comes clear that we do not need less trade but bet­ter trade. Trans­port emis­sions rep­re­sent only a small part of over­all trade-in­duced emis­sions (in ag­gre­gate only one third; at the prod­uct lev­el the me­di­an con­tri­bu­tion for Eu­ro­pean trade flows is 40%). There is on the oth­er hand sub­stan­tial het­ero­gene­ity across coun­tries in terms of how green the pro­duc­tion tech­nol­o­gy of a giv­en good can be, lead­ing to dras­tic dif­fer­ences in the amount of emis­sions caused by the pro­duc­tion of the same good or ser­vice in dif­fer­ent coun­tries.

In­ter­na­tion­al trade has in fact a pos­i­tive role to play in the fight against cli­mate change, by con­nect­ing con­sumers to the green ori­gins of pro­duc­tion. In a hy­po­thet­i­cal world where pro­duc­tion and con­sump­tion pat­terns are kept fixed but ori­gins of pro­duc­tion can change, we find that pro­duc­ing all goods lo­cal­ly in the coun­try they are con­sumed would in fact in­crease GHG emis­sions. On the oth­er hand, sourc­ing goods from the green­est pos­si­ble ori­gin world­wide could, in the par­tic­u­lar ex­am­ple of Eu­ro­pean trade, lead to a de­cline of trade-in­duced emis­sions of as much as 35%. This is the hid­den green sourc­ing po­ten­tial of in­ter­na­tion­al trade.2

We do not need less trade but better trade.

In the real world, pro­duc­tion and con­sump­tion pat­terns, of course, ad­just to price in­cen­tives. We can­not all buy our agri­cul­ture from Switzer­land (the green­est pro­duc­er glob­al­ly) sim­ply be­cause the coun­try does not have the pro­duc­tion ca­pac­i­ty to serve the whole plan­et. If every­one were to try and buy a good from its green­est source, the price of that prod­uct would rise rel­a­tive to oth­er ori­gins, in­duc­ing de­mand to shift to oth­er pro­duc­ers with po­ten­tial­ly worse out­comes in terms of GHG emis­sions. It would, how­ev­er, suf­fice that price sig­nals in­cen­tivize con­sumers to buy their prod­ucts from coun­tries that are rel­a­tive­ly green­er at pro­duc­ing a good giv­en their eco­nom­ic pro­duc­tion ca­pac­i­ties. In oth­er words, pro­duc­ers should spe­cial­ize in their en­vi­ron­men­tal com­par­a­tive ad­van­tage.

To il­lus­trate this con­cept con­sid­er the ex­am­ple of Chi­na and the Unit­ed States pro­duc­ing tex­tiles and ma­chin­ery. Per­haps sur­pris­ing­ly, the Unit­ed States are brown­er at pro­duc­ing both goods than Chi­na. This is, among oth­er rea­sons, be­cause Chi­na has made the greeni­fi­ca­tion of its largest in­dus­try-heavy sec­tors a pri­or­i­ty of its 13th Five-Year Plan.3 How­ev­er, if we com­pare both sec­tors with­in a coun­try, the Unit­ed States are rel­a­tive­ly green­er at pro­duc­ing ma­chin­ery than tex­tiles (with an emis­sion in­ten­si­ty of 22 kg CO2/$ com­pared to 43 kg CO2/$), where­as Chi­na is rel­a­tive­ly green­er at pro­duc­ing tex­tiles than ma­chin­ery (with an emis­sion in­ten­si­ty of 17 kg CO2/$ com­pared to 20 kg CO2/$). If the whole world were only sourc­ing both prod­ucts ac­cord­ing to Chi­naʼs ab­solute en­vi­ron­men­tal ad­van­tage, not only would quan­ti­ties be low­er in both sec­tors, but prices would rise, mak­ing Chi­na less at­trac­tive than the U.S., with the risk of lead­ing con­sumers to buy both prod­ucts from the U.S., there­by gen­er­at­ing more emis­sions. The bet­ter out­come is to source ma­chin­ery from the U.S. and tex­tiles from Chi­na, so as to max­i­mize quan­ti­ties and min­i­mize emis­sions.

Environmental gains from trade can be driven by countries specializing in what they are relatively greener at producing.

This ex­am­ple il­lus­trates the idea that – just as the eco­nom­ic gains from trade are dri­ven by coun­tries spe­cial­iz­ing in what they are rel­a­tive­ly more ef­fi­cient at pro­duc­ing – the en­vi­ron­men­tal gains from trade can be dri­ven by coun­tries spe­cial­iz­ing in what they are rel­a­tive­ly green­er at pro­duc­ing.

Carbon pricing allows to unlock the green sourcing potential of trade

How­ev­er, while mar­ket forces dri­ve coun­tries to spe­cial­ize ac­cord­ing to their eco­nom­ic com­par­a­tive ad­van­tage, there is no rea­son in to­day’s eco­nom­ic con­text to dri­ve coun­tries to spe­cial­ize in their en­vi­ron­men­tal com­par­a­tive ad­van­tage. This is be­cause green­house gas emis­sions are what is called in eco­nom­ics a neg­a­tive ex­ter­nal­i­ty: the cost of emit­ting an ad­di­tion­al ton of CO2 for a firm burn­ing fuel to pro­duce its good or for a house­hold burn­ing gas to heat its lodg­ing is vir­tu­al­ly zero, where­as the so­cial cost of that ex­tra ton will man­i­fest in the mon­e­tary dam­ages re­sult­ing from, for ex­am­ple, burn­ing crops, health-care costs from heat waves or drought, or loss of prop­er­ty from flood­ing. When this so­cial cost is not re­flect­ed in the price of what we con­sume dai­ly, this is a mar­ket fail­ure.

To cor­rect this mar­ket fail­ure many econ­o­mists have pro­mot­ed the idea of a car­bon tax. Car­bon pric­ing means cal­cu­lat­ing the “so­cial cost” of GHG emis­sions by quan­ti­fy­ing the dol­lar net present val­ue of these dam­ages and ty­ing it back to their source through a price, usu­al­ly in the form of a tax on tons of CO2 emit­ted.4 In­stead of dic­tat­ing who should re­duce emis­sions where and how, a car­bon price pro­vides an eco­nom­ic sig­nal to emit­ters, and al­lows them to de­cide to ei­ther trans­form their ac­tiv­i­ties and low­er their emis­sions or con­tin­ue emit­ting and pay­ing for their emis­sions: it is a mar­ket-based so­lu­tion. Only with such a price on emis­sions can firms be in­duced to spe­cial­ize in (cheap­er) green­er pro­duc­tion, thus un­lock­ing the green sourc­ing po­ten­tial of in­ter­na­tion­al trade.

At the Kühne Cen­ter our fo­cus is on un­der­stand­ing and quan­ti­fy­ing this green sourc­ing po­ten­tial of in­ter­na­tion­al trade. To that ef­fect, we sim­u­late the op­ti­mal pat­tern of pro­duc­tion and trade in a world where car­bon is priced glob­al­ly and uni­form­ly at its so­cial cost and de­scribe this coun­ter­fac­tu­al world as the “sus­tain­able glob­al­iza­tion.”

The sustainable globalization can be achieved through three mechanisms: a scale, a composition, and a sourcing effect

We sim­u­late a world econ­o­my with 64 coun­tries (in­clud­ing a resid­ual Rest of the World ag­gre­gate) and 48 sec­tors of eco­nom­ic ac­tiv­i­ty in 2018. Coun­tries are char­ac­ter­ized by con­sumers who buy fi­nal goods both do­mes­ti­cal­ly and through im­ports, and firms that pro­duce these goods us­ing in­ter­me­di­ate in­puts that they buy from oth­er firms both do­mes­tic and for­eign.5 The pro­duc­tion of goods for both fi­nal and in­ter­me­di­ate use is at the source of car­bon emis­sions: from fuel burnt to run ma­chin­ery to gas ex­trac­tion for house­hold heat­ing, in­clud­ing di­rect emis­sions from en­teric fer­men­ta­tion in the cat­tle sec­tor or from ce­ment cre­ationʼs chem­i­cal process­es (see Fig. 1 for a rep­re­sen­ta­tion of the data. In 2018, our cov­er­age ac­counts for 93% of glob­al emis­sions, in­clud­ing emis­sions in methane and ni­trous ox­ide).

A car­bon tax­a­tion im­plies that for any ton of CO2 emit­ted at every step of the pro­duc­tion process (di­rect emis­sions) the pro­duc­er must pay the ex­tra cost of car­bon. This cost will be re­flect­ed in the fi­nal price paid by cus­tomers, but also in the price of in­ter­me­di­ate in­puts bought by oth­er firms, there­fore chang­ing pat­terns of con­sump­tion, pro­duc­tion, and trade. In­di­vid­ual coun­triesʼ and sec­torsʼ dif­fer­ences in pro­duc­tion tech­nol­o­gy and en­er­gy mix — re­flect­ed by their pro­duc­tion emis­sion in­ten­si­ties — will lead to het­ero­ge­neous ef­fec­tive car­bon costs. This will be the main dri­ver of changes in the pat­tern of trade.6

Source: OECD, FAO, EDGAR, and au­thorʼs own work

By putting a price on car­bon emis­sions, a car­bon tax will make brown goods from brown ori­gins rel­a­tive­ly more ex­pen­sive. Mov­ing away from such goods will cause emis­sions to de­crease. This gen­er­al mech­a­nism can be de­com­posed in three con­tribut­ing fac­tors of emis­sion­sʼ re­duc­tions: (i) a scale ef­fect, (ii) a com­po­si­tion ef­fect, and (iii) a sourc­ing ef­fect.

Keep­ing pro­duc­tion and con­sump­tion pat­terns fixed, by in­creas­ing the price of all prod­ucts by their car­bon cost, the car­bon tax will lead to an over­all de­cline in quan­ti­ties con­sumed and pro­duced, which will me­chan­i­cal­ly de­crease emis­sions: it is the scale ef­fect. Con­sid­er­ing the scale of con­sump­tion and pro­duc­tion as well as their ge­o­graph­ic ori­gin fixed, the car­bon tax will in­crease the price of brown sec­tors rel­a­tive­ly more than that of green sec­tors. For ex­am­ple, man­u­fac­tur­ing goods (that are glob­al­ly quite car­bon in­ten­sive) will be­come more ex­pen­sive re­gard­less of their ori­gin than any elec­tric equip­ments from any­where (as elec­tric equip­ments are rel­a­tive­ly sig­nif­i­cant­ly green­er). As a re­sult, con­sump­tion will be di­vert­ed away from brown sec­tors to­wards green ones, there­by re­duc­ing glob­al GHG emis­sions: it is the com­po­si­tion ef­fect. Fi­nal­ly, keep­ing vol­umes of pro­duc­tion and con­sump­tion fixed across the sec­tors, coun­triesʼ dif­fer­ences in pro­duc­tion tech­nol­o­gy will lead to het­ero­ge­neous ef­fec­tive car­bon costs for a giv­en prod­uct: for ex­am­ple, Fin­landʼs wood sec­tor (with an ef­fec­tive ad­di­tion­al car­bon cost of $0.9 per dol­lar of wood pro­duced) will be rel­a­tive­ly much cheap­er than the In­done­sian one (with an ef­fec­tive ad­di­tion­al car­bon cost of $28.9 per dol­lar of wood pro­duced). As a re­sult, the price of a giv­en good will be rel­a­tive­ly cheap­er when com­ing from a green pro­duc­er than a brown one, lead­ing to a shift of con­sump­tion away from brown ori­gins to­wards green ones, there­by re­duc­ing glob­al pro­duc­tion emis­sions for this prod­uct: this is the sourc­ing ef­fect at the cen­ter of this Im­pact Se­ries.

Note that while the scale ef­fect and the com­po­si­tion ef­fect can oc­cur in a closed-econ­o­my world, the sourc­ing ef­fect is fun­da­men­tal­ly about in­ter­na­tion­al trade: it shows that a key role of in­ter­na­tion­al trade in the fight against cli­mate change is to con­nect con­sumers to green pro­duc­ers.

More than one-third of global emissionsʼ reduction from carbon pricing is due to the environmental gains from trade

Fig­ure 2 quan­ti­fies the con­tri­bu­tion of each of these ef­fects to the to­tal emis­sion re­duc­tion achieved by a uni­form and glob­al car­bon tax, for vary­ing val­ues of the price of a ton of car­bon. Three key mes­sages can be de­rived from it. First, a glob­al and uni­form car­bon tax ap­pears to be ex­treme­ly ef­fi­cient to de­crease GHG emis­sions at a low cost: a glob­al price of car­bon of $100/tCO2 would for ex­am­ple lead to a de­cline in glob­al emis­sions of 27.5% for a gross out­put de­cline of only 2.6% and a real in­come de­cline even small­er of 0.7%. This would bring us for­ward by 14 years on the emis­sions mit­i­ga­tion path­way that would keep us be­low the 2°C glob­al warm­ing tar­get of the Paris ac­cord with 66% un­cer­tain­ty.

A global and uniform carbon tax appears to be extremely efficient to decrease GHG emissions at a low cost.

Sec­ond, the con­tri­bu­tion of these three ef­fects — scale, com­po­si­tion and sourc­ing — ap­pears to be ex­treme­ly sta­ble re­gard­less of the val­ue of the car­bon tax: past the thresh­old of a $200/tCO2 car­bon tax, the rel­a­tive con­tri­bu­tion of each ef­fect does not change much. This sug­gests that their rel­a­tive con­tri­bu­tion is trig­gered sole­ly by the sig­nal that the car­bon tax rep­re­sents on emis­sion­sʼ costs. The size of the penal­ty that the tax car­ries (the ef­fec­tive car­bon price) will only af­fect the scale of these ef­fects (how many emis­sions are ef­fec­tive­ly saved), not how they in­ter­play. Third, the green sourc­ing po­ten­tial of in­ter­na­tion­al trade is sub­stan­tial. The con­tri­bu­tion of the green sourc­ing ef­fect to the re­duc­tion of emis­sions in re­sponse to a $100/tCO2 car­bon tax is 35.6%: in oth­er words, more than a third of the de­cline in emis­sions that we can achieve if we price car­bon at its so­cial cost comes from the green sourc­ing po­ten­tial of in­ter­na­tion­al trade.

To fur­ther il­lus­trate the pos­i­tive role in­ter­na­tion­al trade can play by bring­ing about a sus­tain­able glob­al­iza­tion, we will con­tin­ue the analy­sis of a coun­ter­fac­tu­al world with a $100/tCO2 car­bon tax.

The sectoral-composition effect manifests in a shift away from agriculture, energy and raw materials towards manufacturing goods and services

As il­lus­trat­ed above, the scale ef­fect con­tributes the least to the re­duc­tion of emis­sions in­duced by car­bon pric­ing (9.8%). In a world with­out tech­no­log­i­cal in­no­va­tion or car­bon sinks like the one sim­u­lat­ed by our mod­el, de­creas­ing emis­sions im­plies de­creas­ing pro­duc­tion and con­sump­tion to some ex­tent. De­spite this me­chan­i­cal ef­fect of our mod­el, glob­al gross out­put de­clines only by 2.6% in re­sponse to a $100/tCO2 car­bon tax.

The com­po­si­tion ef­fect has the largest con­tri­bu­tion to the de­cline in emis­sions (55%). Emis­sions are re­duced be­cause the out­put share of sec­tors that tend to con­tribute rel­a­tive­ly more to glob­al emis­sions is ad­just­ed down. This is il­lus­trat­ed in Fig. 3, where each tri­an­gle rep­re­sents the change of a giv­en sec­torʼs weight in the glob­al pro­duc­tion bas­ket, and each bar the cor­re­spond­ing gain in glob­al emis­sions.

Source: Own work

By far the largest emis­sion re­duc­tions come from two out­liers: agri­cul­ture and en­er­gy. Both see rel­a­tive­ly larg­er de­clines in their pro­duc­tion share in re­sponse to a glob­al car­bon tax (re­spec­tive­ly 0.5 and 0.6 per­cent­age points), for the largest emis­sion de­clines (resp. 3.2% and 7.3% of glob­al emis­sions). This can be ex­plained by the fact that both these sec­tors are pre­dom­i­nant in the glob­al pro­duc­tion bas­ket — as es­sen­tial goods for con­sump­tion and pro­duc­tion they rep­re­sent cu­mu­la­tive­ly about 6% of glob­al out­put —, and the two most car­bon-in­ten­sive sec­tors. Note that such large de­clines in pro­duc­tion are plau­si­ble for two rea­sons. First, by con­struc­tion of our data our sec­tors are rather coarse and hide po­ten­tial­ly large re­al­lo­ca­tions across sub­sec­tors. In the agri­cul­tur­al sec­tor, live­stock pro­duc­tion is by far the most pol­lut­ing sub­sec­tor while rep­re­sent­ing a very large frac­tion of agri­cul­tur­al out­put both di­rect­ly (meat pro­duc­tion) and in­di­rect­ly (an­i­mal feed).7 A glob­al change of diet to­wards veg­e­tar­i­an op­tions would bring about sig­nif­i­cant de­cline in both gross out­puts and emis­sions with­out nec­es­sary threat­en­ing con­sump­tion needs. Sec­ond, gen­er­al equi­lib­ri­um ef­fects may ex­plain large de­clines in the out­put of up­stream ma­te­ri­als for brown sec­tors. En­er­gy be­ing up­stream of all sec­tors of pro­duc­tion, a glob­al de­cline of out­put by 2.6% plau­si­bly im­plies a de­crease of en­er­gy re­quire­ments across the en­tire in­put-oup­tut struc­ture of the econ­o­my.

For the re­main­ing sec­tors, we ob­serve over­all a re­al­lo­ca­tion of pro­duc­tion away from brown in­dus­tries to­wards green ones: the weight of ser­vices and of most man­u­fac­tur­ing goods in­creas­es in the glob­al pro­duc­tion bas­ket, where­as the share of trans­ports, raw ma­te­ri­als and en­er­gy de­clines. De­spite an in­crease of their out­put share, there is no sig­nif­i­cant in­crease in glob­al emis­sions as­so­ci­at­ed with the re­al­lo­ca­tion of pro­duc­tion to­wards ser­vices or most man­u­fac­tur­ing sec­tors. This is be­cause they con­tribute very lit­tle to glob­al emis­sions rel­a­tive­ly to how much they are con­sumed. Con­verse­ly, the de­cline in the out­put share of trans­porta­tion sec­tors gen­er­ates lit­tle emis­sion re­duc­tions, as they donʼt weight par­tic­u­lar­ly much in glob­al emis­sions rel­a­tive to how need­ed they are in pro­duc­tion and con­sump­tion.8 This il­lus­trates the con­tri­bu­tion of the com­po­si­tion ef­fect to to­tal emis­sions de­clines.

The scale ef­fect and the com­po­si­tion ef­fect can dri­ve emis­sion­sʼ re­duc­tions even if all coun­tries were liv­ing in au­tarky. In truth, how­ev­er, such large re­al­lo­ca­tions of pro­duc­tion can only be achieved ef­fi­cient­ly if coun­tries are spe­cial­iz­ing ac­cord­ing to their eco­nom­ic and en­vi­ron­men­tal com­par­a­tive ad­van­tage. In oth­er words, one would not achieve a 18% re­duc­tion of glob­al emis­sions (64.4% of the 27.5% de­cline ob­tained with a $100/tCO2 car­bon tax) in a world with no in­ter­na­tion­al trade. How­ev­er, by al­low­ing con­sumers to ex­ploit the tech­no­log­i­cal dif­fer­ences across pro­duc­ers, in­ter­na­tion­al trade gen­er­ates both eco­nom­ic and en­vi­ron­men­tal gains from trade. The sourc­ing ef­fect con­tributes an ad­di­tion­al 35.6% of the glob­al emis­sion de­cline.

Patterns of green sourcing lead to an aggregate shift of trade from the South to the North and to individual green specializations

For any giv­en sec­tor, there is a large dis­crep­an­cy across coun­tries in terms of the emis­sions gen­er­at­ed by one dol­lar of good pro­duced. For ex­am­ple, in the sec­tor of coke pro­duc­tion (in­dus­tri­al coal), Aus­tralia emits 1316 kg of CO2eq. per dol­lar pro­duced, where­as Ar­genti­na emits 350 kg of CO2eq. Be­cause the glob­al con­tri­bu­tion of Aus­tralia and Ar­genti­na to the glob­al pro­duc­tion of coke is rough­ly sim­i­lar (resp. 5.13% and 5.12%), this gap in tech­nol­o­gy ex­plains the large dis­crep­an­cy in their rel­a­tive con­tri­bu­tion to to­tal emis­sions in­duced by this sec­tor (resp. 1.5% and 0.4%). In re­sponse to a $100/tCO2 car­bon tax, the con­tri­bu­tion of Aus­tralia to glob­al pro­duc­tion of coke de­creas­es by 0.09 per­cent­age points, where­as the out­put share of Ar­genti­na in­creas­es by 0.002 per­cent­age points, in­duc­ing a net de­crease of glob­al emis­sions (–0.01% for Aus­tralia, no in­crease in emis­sions from Ar­genti­na). When ex­tend­ed to all coun­tries of the globe and across all sec­tors, this mech­a­nism alone gen­er­ates a de­cline in glob­al emis­sions of 9.8%: these are the en­vi­ron­men­tal gains from trade.

At the ag­gre­gate lev­el, as for sec­tors, some coun­tries tend to con­tribute rel­a­tive­ly more to glob­al pro­duc­tion than to glob­al emis­sions, so that they tend to be fa­vored as a green sourc­ing ori­gin in re­sponse to a car­bon tax. And vice ver­sa, some coun­tries are large emit­ters above and be­yond their pro­duc­tion share, so they tend to see their out­put share de­cline in or­der to re­duce emis­sions. As il­lus­trat­ed in Fig. 4, this re­al­lo­ca­tion oc­curs in fa­vor of coun­tries of the eco­nom­ic North (e.g., Ger­many, Japan, Fin­land, the U.S.) who are large out­put con­trib­u­tors but rel­a­tive­ly green pro­duc­ers, away from coun­tries of the South (e.g., South Africa, Peru, Cam­bo­dia) and the BRICS who tend to con­tribute more to glob­al emis­sions than to glob­al out­put.9

To pro­vide a few con­crete ex­am­ples, ag­gre­gate trade from Chi­na to the Rest of the World — which com­pris­es most African coun­tries ex­cept for Maghreb and South Africa — de­clines by 11% in re­sponse to a $100/ tCO2 glob­al car­bon tax, and the in­verse flow by 14%. At the oth­er end of the spec­trum, trade from Ger­many to France or the U.S. re­mains vir­tu­al­ly un­changed (re­spec­tive­ly +0.5% and –0.8%). In­ter­est­ing­ly, trade with­in NAF­TA shifts in fa­vor of US-Mex­i­co trade and away from US-Cana­da trade.

Source: Own work

At the sec­tor lev­el, how­ev­er, there are no such clear-cut ge­o­graph­ic pat­terns of trade re­al­lo­ca­tion. The eco­nom­ic and en­vi­ron­men­tal com­par­a­tive ad­van­tage of a coun­try re­flects the in­ter­ac­tion of la­bor costs, nat­ur­al re­sources, and pro­duc­tiv­i­ty, lead­ing to some­times sur­pris­ing re­al­lo­ca­tions.

For ex­am­ple, Chileʼs pro­duc­tion tech­nol­o­gy is rel­a­tive­ly brown across the sec­tors, so its out­put share de­clines on ag­gre­gate. How­ev­er, the nat­ur­al ge­og­ra­phy of Chile makes it rel­a­tive­ly green­er at pro­duc­ing cop­per and cot­ton so that its ex­port share of agri­cul­tur­al goods and ba­sic met­als in­creas­es sig­nif­i­cant­ly (de fac­to, Chileʼs share of glob­al trade in ba­sic met­als in­creas­es by 40%). At the oth­er ex­treme, Nor­way is known to have mas­sive re­sources in pe­tro­le­um (sec­tor of min­ing en­er­gy, which rep­re­sents 13% of Nor­wayʼs pro­duc­tion in 2018). How­ev­er, be­cause the coun­try has some of the green­est tech­nol­o­gy of pro­duc­tion in many oth­er sec­tors, Nor­wayʼs pro­duc­tion share in the min­ing en­er­gy sec­tor in re­sponse to a $100/tCO2 car­bon tax de­clines (al­beit by only 0.5%), free­ing up pro­duc­tion ca­pac­i­ties for oth­er sec­tors such as the sec­tors of wood, plas­tic, and en­er­gy (elec­tric­i­ty). Go­ing back to our ex­am­ple of Chi­na and the U.S. from the be­gin­ning of this se­ries, it turns out that Chi­na will in­deed spe­cial­ize even fur­ther in tex­tiles in re­sponse to a car­bon tax, along with elec­tron­ics and the whole­sale and re­tail trade sec­tor. The U.S. on the oth­er hand will in­deed fur­ther spe­cial­ize in ma­chin­ery, man­u­fac­tur­ing and trans­porta­tion equip­ment.

Buying green not local does not imply more trade, it simply implies better trade

The green sourc­ing ef­fect will lead to an in­crease in trade flows where it is most need­ed. The en­er­gy sec­tor is a par­tic­u­lar­ly good ex­am­ple: in the ab­sence of a car­bon tax, it is very lit­tle trad­ed (only 1.25% of glob­al En­er­gy out­put) and con­tributes the most to glob­al emis­sions (28%). By in­cen­tiviz­ing con­sumers and pro­duc­ers to seek the rel­a­tive­ly green­er ori­gins, the car­bon tax leads to an in­crease in the share of out­put trad­ed of the en­er­gy sec­tor by 30%. Eu­ro­pean coun­tries re­main im­por­tant ex­porters, with a large in­crease of in­tra-EU trade flows from the north­east part of the con­ti­nent, but new ex­porters en­ter the mar­ket in re­sponse to the car­bon tax: for ex­am­ple New Zealand, whose ex­port share in the En­er­gy sec­tor triples to serve most­ly Ocea­nia and South­east Asia, or Colom­bia, whose share dou­bles. The share of glob­al emis­sions saved by this in­ten­si­fi­ca­tion of trade — pre­dom­i­nant­ly with­in con­ti­nen­tal re­gions — is 4.6%.10

In­ter­est­ing­ly, the green sourc­ing ef­fect can also im­ply that con­sum­ing lo­cal is en­vi­ron­men­tal­ly more de­sir­able than trade in some cas­es. The best ex­am­ple of this is the agri­cul­tur­al sec­tor. In the ab­sence of a car­bon tax, agri­cul­tur­al goods are heav­i­ly trad­ed (with a share of out­put trad­ed of 7%), and the largest ex­porters world­wide are sub-Sa­ha­ran coun­tries ag­gre­gat­ed in the Rest of the World, the U.S., and Brazil. How­ev­er, both the Rest of the World and Brazil are ex­treme­ly car- bon-in­ten­sive pro­duc­ers of agri­cul­tur­al goods. As a re­sult, the green sourc­ing ef­fect leads to a dras­tic de­cline of their out­put share in fa­vor of an in­crease in the out­put share of most of the oth­er coun­tries glob­al­ly (in par­tic­u­lar Chi­na), for a glob­al gain of –5.2% in GHG emis­sions.

These ex­am­ples il­lus­trate the true mean­ing of our mot­to “Buy Green not Lo­cal.” The green sourc­ing po­ten­tial of in­ter­na­tion­al trade does not im­ply a mas­sive in­crease in the vol­ume of trade flows glob­al­ly. In fact, in the case of a $100/tCO2 car­bon tax, the share of glob­al out­put trad­ed stays con­stant at 13%. How­ev­er, it im­plies trad­ing more where emis­sions can be saved, and less where emis­sions can­not be avoid­ed, there­by al­low­ing trade to play an in­stru­men­tal role in the fight against cli­mate change.


In this Kühne Im­pact Se­ries, we took a fresh look at the role of in­ter­na­tion­al trade in the fight against cli­mate change. With the use of a mod­ern quan­ti­ta­tive mod­el of pro­duc­tion, con­sump­tion, and trade, we op­er­a­tional­ize the no­tion of “sus­tain­able glob­al­iza­tion” and sim­u­late the glob­al pat­tern of trade that would pre­vail if car­bon were priced at its so­cial cost. Our main re­sult is that more than a third of the po­ten­tial glob­al GHG emis­sions re­duc­tion achieved by a glob­al car­bon tax is due to the en­vi­ron­men­tal gains from trade.

  1. See our Kühne Im­pact Se­ries “Buy Green not Lo­cal: How in­ter­na­tion­al trade can help save our plan­et” (03/2021) for a de­tailed dis­cus­sion of het­ero­gene­ity in emis­sion in­ten­si­ties across pro­duc­ing coun­tries and sec­tors.
  2. See our Kühne Im­pact Se­ries “The Hid­den Green Sourc­ing Po­ten­tial in Eu­ro­pean Trade” (01/2022).
  3. See the 2017 OECD study on the “In­dus­tri­al Up­grad­ing for Green Growth in Chi­na”: In­dus­tri­al_Up­grad­ing_Chi­na_June_2017.pdf While be­ing the worldʼs largest pol­luter in ab­solute term, Chi­na has placed en­er­gy ef­fi­cien­cy at the top of its pri­or­i­ties in its 10th and 11th Five-Year Plans, and car­bon emis­sion re­duc­tions in its 12th and 13th Plans.
  4. To put this num­ber in per­spec­tive, a new car in 2021 emits around 1 ton of CO2 per 10,000 km, which is close to the av­er­age dis­tance trav­elled by a car in a year (e.g., Ger­many: 13.602 km per year, Italy: 8,464 km per year). A good rule of thumb to rep­re­sent a ton of CO2 is there­fore to con­sid­er the tailpipe emis­sions of a car with­in a year.
  5. For a com­plete de­scrip­tion of the mod­el and an ex­haus­tive list of data sources, see Le Moigne, Lep­ot, Ossa, Ri­tel, and Si­mon (2022). “A Quan­ti­ta­tive Analy­sis of Sus­tain­able Glob­al­iza­tion” (Work­ing Pa­per).
  6. A few key as­sump­tions are worth men­tion­ing. First, the mod­el as­sumes con­stant tech­nol­o­gy in re­sponse to the car­bon tax­a­tion (“no greeni­fi­ca­tion” of pro­duc­tion). This im­plies that we quan­ti­fy the re­duc­tion of emis­sions with­out hav­ing to as­sume mas­sive tech­nol­o­gy changes but lim­its the pos­si­bil­i­ty to quan­ti­fy in­cen­tives to in­vest in green tech­nolo­gies, which are in fact nec­es­sary to real­ly achieve net zero. Sec­ond, the tax on car­bon emis­sions is levied by na­tion­al au­thor­i­ties (not by a supra­na­tion­al gov­ern­ment) and re­dis­trib­uted di­rect­ly to do­mes­tic con­sumers. Again, this has the ben­e­fit of sim­pli­fy­ing the quan­ti­ta­tive as­sess­ment by al­low­ing us to con­sid­er coun­tries as iso­lat­ed po­lit­i­cal en­ti­ties, but ex­cludes the pos­si­bil­i­ty of strate­gic in­ter­ac­tions, which are one of the main hur­dles in im­ple­ment­ing a car­bon tax glob­al­ly.
    Fi­nal­ly, in the cur­rent ver­sion of the re­sults the trade elas­tic­i­ty of all sec­tors is equal to 4: this means that the con­sump­tion re­sponse to a change in the price of im­ports is the same across all sec­tors when in re­al­i­ty the sen­si­tiv­i­ty of our con­sump­tion of food to prices tend to be much stiffer than our re­ac­tion to a change in the price of trans­port ser­vices for ex­am­ple.
  7. De­tailed data on agri­cul­tur­al pro­duc­tion and emis­sions are pub­licly avail­able and eas­i­ly ac­ces­si­ble.
  8. The role of trans­porta­tion in our mod­el is per­fect­ly sym­met­ric to any oth­er sec­tor of pro­duc­tion. We are cur­rent­ly ex­plor­ing ways to al­low trans­porta­tion in­puts to scale up if a prod­uct is des­tined to be trad­ed.
  9. We will ex­plore this North-South di­vi­sion fur­ther in our next Kühne Im­pact Se­ries: “The dis­tri­b­u­tion­al ef­fects of car­bon pric­ing: A glob­al view of com­mon but dif­fer­en­ti­at­ed re­spon­si­bil­i­ties.”
  10. Two points need to be em­pha­sized here. First, part of the in­crease in the trade share of en­er­gy is me­chan­i­cal: we men­tioned above that the gross out­put of en­er­gy de­clines sig­nif­i­cant­ly in re­sponse to the car­bon tax. If trade flows de­cline rel­a­tive­ly less than gross out­put (which in­cludes do­mes­tic con­sump­tion), the ra­tio of the two has to in­crease. Sec­ond, note that the en­er­gy sec­tor en­com­pass­es both elec­tric­i­ty and gas. The mod­el ac­counts at least par­tial­ly for the fact that elec­tric­i­ty is not eas­i­ly trad­ed on long dis­tances thanks to the per­fect cal­i­bra­tion of the trade costs, but we do not have enough de­tail to know how strong the (en­vi­ron­men­tal­ly de­sir­able) sub­sti­tu­tion be­tween gas and elec­tric­i­ty would im­pact the ag­gre­gate ef­fect on long-dis­tance trade in en­er­gy. As such the ob­served pat­terns of trade are not im­plau­si­ble and re­main pre­dom­i­nant­ly con­ti­nen­tal.


Mathilde Le Moigne

Senior Research Fellow at the Kühne Center for Sustainable Trade and Logistics at the University of Zurich


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