On Sharing Responsibilities for Pollution Embodied in Trade

Overview & Synopsis

In this article, we propose a new way of assessing environmental responsibility at the country level, taking into account their trade balance in terms of carbon. Starting from the fact that the approach based on the respective responsibilities of the producer and the consumer, which are widely promoted and used in the literature, each have their own limitations, we introduce a modified formula for the net trade balance of carbon at the country level. To do this, we examine the extent to which trade flows for a given country increase or decrease global emissions relative to the virtual situation where imports would have been produced in the consumer country. We argue that it would be fair for countries to retain responsibility for the additional emissions they create when trading. We then discuss the incentives provided by the modified liability rule to reduce emission intensity and extend our formula to include trade in intermediate goods. Finally, we illustrate our concept using World Bank and OECD data on trade flows and emission intensity ratios. We characterize six groups of countries according to the respective order of their producer, consumer and our new liability rule.