As the host of the postponed COP26 climate summit, the UK has set out the ambitious goal to convince all countries to commit to reach net zero emissions as soon as possible within their mandatory climate targets. Reducing overall emissions remains the paramount task of global climate governance. However, an overlooked but defining question concerns carbon accounting—the methodology of how national CO2 emissions are assessed. The conventional territory-related production approach, which has traditionally been used in climate governance, stands in contrast to an often ignored consumption-based approach, which more closely captures emissions embodied in the domestic end-use of energy and goods. This article lays out why the seemingly dull and technical matter of carbon accounting has the potential to become the future stepping-stone for a global consensus on climate mitigation. Further, it offers a perspective of how to integrate the realities of a globalized economy into today’s nation-centred climate governance.
The carbon accounting mechanism of the Paris Climate Agreement (PA), concluded in 2015, focuses on the territorial production of emissions within states. These include emissions from domestic energy use, transport, or manufacturing activities. However, academics have identified the concept of ‘net emission transfers’—the balance of emissions embodied in the trade of exported and imported goods. From 1990 to 2008, developed countries’ net emissions balance from the consumption of imported goods has seen an increase from 0.4 to 1.6 Gt C02, making up roughly 5% of total global emissions. According to the production-based approach of the PA, these emissions are counted towards the emission balance of the countries in which they are produced, mostly emerging or developing economies. However, the consumption of these tradable goods occurs in developed countries. This creates a natural tension between these countries as to who is responsible for the emissions.
Incorporating net emission transfers through a consumption-based method, advanced economies would thus significantly increase their share of global emissions. Just in the agricultural sector, the consumption-based approach would increase the UK’s net agricultural emissions by 40% and the Netherlands’ by an even larger magnitude of 75%. For the EU in general, consumption-based estimations by the advocacy group Climate Works point towards an 11% rise in emissions compared to the 1990 benchmark. According to the official production-based approach, the EU has achieved GHG reductions of more than -20% (Eurostat 2020). Environmental advocates therefore speak of a persistent ‘carbon loophole’ created by the production-based approach to carbon accounting.
In short, the current climate governance framework allows service-oriented, high-income economies to pose as ideal students with low emission balances. Meanwhile, the share of emissions that are created through its consumption or investments in third countries fly under the radar. These emissions, in today’s global economy, accrue disproportionally to emerging countries with low labour costs or large natural resource endowments. Without a new global agreement on carbon accounting, those countries that produce essential inputs and manufacture for the world economy will be systematically disadvantaged. A new cleavage between developed and developing countries on the issue of production- versus consumption-based accounting of CO2 emissions is a likely result. Carbon accounting could become a roadblock for future climate governance, as developing countries feel they are getting an unfair deal.
The question then becomes: how can the climate governance system solve this impasse and integrate a consumption-based accounting approach to the Paris Agreement? Admittedly, consumption-based approaches are immensely difficult to apply in practice. It requires detailed bookkeeping all along value-chains, for all sizes of companies, and in countries with differing institutional capacities. But in the short- and medium-term, the existing methods for larger companies and aggregate trade flows are a valuable point of departure to inform the global debate on climate change. The EU’s non-binding Climate Reporting Guidelines or the academic database Eora MRIO are two such manifestations.
A helpful first step is to include consumption-based carbon accounting as mandatory supplements to national emission statements. These figures improve awareness that carbon emissions around the globe are created within a highly complex structure of economic supply and demand. Such an acknowledgement has tangible real-world implications: In trade policy, so-called ‘win-win’ situations of bilateral trade can no longer be purely economically, but also need to be ecologically conscious, in order to make it attractive to all parties involved. Hence, industrialized countries with negative emission transfers will have an incentive to work towards a more balanced approach to carbon accounting. It might also help them reinvigorate the appetite for an open trade system.
Eventually, the Paris Agreement will have to overcome secluded national boundaries when imagining a workable global climate governance. Fully introducing a more equitable carbon-accounting method is paramount to upholding an international consensus on climate mitigation and rectify perceived injustices. Otherwise, recently announced net-zero targets in industrialized countries, such as Canada, Japan or the UK, will be met with increasing discontent in states at the other end of the economic spectrum. Climate mitigation is necessarily a global project and maintaining global credibility is therefore an obligation to all parties involved. It is imperative that we be creative and resourceful to make carbon-accounting work for all.