Carbon Embedded in China’s Trade

A large fraction of China’s greenhouse gas emissions are incurred in order to satisfy final demand of consumers in other countries; in effect, carbon emissions are embedded in China’s exports. This paper explores the economic context and policy implications of carbon embedded in China’s trade. China is a net exporter of embedded carbon because its entire economy is carbon-intensive; if China had its current trade patterns but U.S. carbon intensities in every sector, its net export of embedded carbon would disappear. China’s success in trade is based on labor costs, not carbon emissions; there is literally no correlation between carbon intensity and revealed comparative advantage within the Chinese economy today.

In terms of policy, developed countries have discussed border tax adjustments on imports from countries with lower carbon prices. However, since China’s comparative advantage is not based on carbon intensity, a border tax adjustment on carbon-intensive goods would do little harm to China, and would have little benefit for developed countries. A globally harmonized carbon price, often assumed to be crucial to successful climate policies, is not strictly necessary in theory, and may not be introduced for some time in practice. When and if it occurs, a harmonized carbon price will raise costs for China’s carbon-intensive industries, but will also create an opportunity for China to “leapfrog” beyond the technologies developed in high-income countries and take the lead in creating the technological basis for a sustainable future.

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