Carbon Inequality across Developed and Emerging Markets.

Whilst this is an incredibly complex topic and requires engagement and action from multiple stakeholders, in this blog, we discuss at a high-level the CO2 emissions linked to production, consumption, trade and how the greater (albeit justified) focus on emissions may be penal for developing countries, as much of the emissions produced in developing countries are linked to export flow to developed markets.

Who has contributed most to emissions?

Since 1751 the world has emitted over 1.5 trillion tonnes of CO2. To reach our climate goal of limiting average temperature rise to 2°C, the world needs to urgently reduce emissions. One common argument is that those countries which have added most to the CO2 in our atmosphere – contributing most to the problem today – should take on the greatest responsibility in tackling it.

There are some key points we can note from this perspective:

  • The United States has emitted more CO2 than any other country to date: at around 400 billion tonnes since 1751, it is responsible for 25% of historical emissions;

  • This is twice more than China – the world’s second largest national contributor;

  • The 28 countries of the European Union (EU-28) – which are grouped together here as they typically negotiate and set targets on a collaborative basis – is also a large historical contributor at 22%;

  • Many of the large annual emitters today – such as India and Brazil – are not large contributors in a historical context;

  • Africa’s regional contribution – relative to its population size – has been very small. This is the result of very low per capita emissions – both historically and currently.

Through the unchecked utilisation fossil fuels and industrial revolutions todays developed markets got to where they are today. These countries now have the technology and financial capabilities to help fast-track the energy transition in developing markets and share best practices learned over time and through R&D to optimise CO2 emissions as they go on their growth journeys as well as produce goods consumed in developed markets.

On a production basis, Asia is by far the largest emitter, accounting for 53% of global emissions. As it is home to 60% of the world’s population this means that per capita emissions in Asia are slightly lower than the world average – however this population has increasing wealth and demands on resources.

We have seen action being taken to help tackle this, for example, The Association of European Development Finance Institutions (EDFI), which has a combined US$50 billion under management in emerging and frontier markets, have been strong proponents of sustainable and responsible investing across sectors since their inception, however, to help further fast-track the change that is required to avoid the impending climate crisis, greater tempo and more stakeholders need to act, particularly private sector investors.

Whilst emissions can be optimised via such support, one of the key aspects that needs to be addressed is the inequality in emissions production and consumption, and a greater emphasis put on “reduce & replace” measures.

Global inequalities by production

There are two parameters that determine our collective CO2 emissions: the number of people, and quantity emitted per person. We either talk about total annual or per capita emissions. They tell very different stories, and this often results in confrontation over who can really make an impact: rich countries with high per capita emissions, or those with a large population.

Emissions by country’s income

  • When aggregated in terms of income, we can see that the richest half (high and upper-middle income countries) emit 86% of global CO2 emissions. The bottom half (low and lower-middle income) only 14%. The very poorest countries (home to 9% of the global population) are responsible for just 0.5%. This provides a strong indication of the relative sensitivity of global emissions to income versus population. Even several billion additional people in low-income countries — where fertility rates and population growth are already highest — would leave global emissions almost unchanged. 3 or 4 billion low-income individuals would only account for a few percent of global CO2. At the other end of the distribution however, adding only one billion high income individuals would increase global emissions by almost one-third.

Emissions by world region

  • When aggregated by region we see that North America, Oceania, Europe, and Latin America have disproportionately high emissions relative to their population. North America is home to only 5% of the world population but emits nearly 18% of CO2 (almost four times as much). Asia and Africa are underrepresented in emissions. Asia is home to 60% of the population but emits just 49%; Africa has 16% of the population but emits just 4% of CO2. This is reflected in per capita emissions; the average North American is more than 17 times higher than the average African.

This inequality in global emissions lies at the heart of why international agreement on climate change has (and continues to be) so contentious. The richest countries of the world are home to half of the world population and emit 86% of CO2 emissions. We want global incomes and living standards — especially of those in the poorest half — to rise. To do so whilst limiting climate change, it’s clear that we must shrink the emissions of high-income lifestyles. Finding the compatible pathway for levelling this inequality is one of the greatest challenges of this century.

Global inequalities by consumption

The initial comparison of emissions by income group and region was based on ‘territorial’ emissions (those emitted within a country’s borders) — these are termed ‘production-based’ and are the metrics by which emissions are commonly reported. However, these emissions do not account for traded goods (for which CO2 was emitted for their production). If a country is a large importer of goods, its production-based emissions would underestimate the emissions required to support its standard of living. Conversely, if a country is a large goods exporter, it includes emissions within its accounts which are ultimately exported for use or consumption elsewhere.

How do consumption-based emissions change the emission shares by income group and region?

On a production basis we had previously found that the richest (high and upper-middle income) countries in the world accounted for half of the population but 86% of emissions. On a consumption basis we find the same result but resulting from the fact that upper-middle income countries primarily export emissions to high income countries. High income countries’ collective emissions increase from 39 to 46% when adjusted for trade (with only 16% of the population); upper-middle income countries’ emissions decrease by the same amount (7% points) from 48 to 41%. Overall, this balances out in the top half of the world population: upper-middle income countries are net exporters whilst high income net importers.

In the bottom half, it appears that very little changes for the collective of lower-middle- and low-income countries: their production and consumption emissions shares are effectively the same.

By region we see that traded emissions tend to flow from Asia to North America and Europe (Asia’s share reduces when adjusted for trade whilst North America and Europe’s share increases).

Note here that consumption-based emissions are not available for all countries. Collectively, countries without consumption-based estimates due to poor data availability account for approximately 3% of global emissions. Many of the missing countries are at low and lower-middle incomes. With the addition of these countries, we would expect small percentage point shifts across the distribution. The challenges in accounting for carbon embedded in global trade mean these estimates are not perfect; nonetheless they should provide a good approximation of the global transfers across the world.

On a consumption basis, high-income countries (Europe and North America in particular) account for an even larger share of global emissions (46% — nearly three times their population share of 16%).

Which countries in the world are net importers of emissions and which are net exporters?

To give a perspective on the importance of trade these emissions are put in relation to the country’s domestic, production-based emissions.

Countries shown in red are net importers of emissions – they import more CO2 embedded in goods than they export. For example, the USA has a value of 7.7% meaning its net import of CO2 is equivalent to 7.7% of its domestic emissions. This means emissions calculated on the basis of ‘consumption’ are 7.7% higher than their emissions based on production.

Countries shown in blue are net exporters of emissions – they export more CO2 embedded in goods than they import. For example, China’s value of -14% means its net export of CO2 is equivalent to 14% of its domestic emissions. The consumption-based emissions of China are 14% lower than their production-based emissions.

We see quite a regional East-West split in net exporters and importers: most of Western Europe, the Americas, and many African countries are net importers of emissions whilst most of Eastern Europe and Asia are net exporters.

We see that the consumption-based emissions of the US are higher than production: In 2016 the two values were 5.7 billion versus 5.3 billion tonnes – a difference of 8%. This tells us that more CO2 is emitted in the production of the goods that Americans import than in those products Americans export.

The opposite is true for China: its consumption-based emissions are 14% lower than its production-based emissions. On a per capita basis, the respective measures are 6.9 and 6.2 tonnes per person in 2016. A difference, but smaller than what many expect.

Whilst China is a large CO2 emissions exporter, it is no longer a large emitter because it produces goods for the rest of the world. This was the case in the past, but today, even adjusted for trade, China now has a per capita footprint higher than the global average (which is 4.8 tonnes per capita in 2017).

These comparisons provide an answer to the question whether countries have only achieved emissions reductions by offshoring emissions intensive production to other countries. If only production-based emissions were falling whilst consumption-based emissions were rising, this would suggest it was ‘offshoring’ emissions elsewhere. There are some countries where this is the case. Examples where production-based emissions have stagnated whilst consumption-based CO2 steadily increased include Ireland in the early 2000s; Norway in the late 1990s and early 2000s; and Switzerland since 1990.

On the other hand, there are several very rich countries where both production- and consumption-based emissions have declined. This has been true, among others, for the UK, France, Germany, and the USA. These countries have achieved some genuine reductions without outsourcing the emissions to other countries. Emissions are still too high in all these countries, but it shows that genuine reductions are possible.

In most countries emissions increased when countries become richer, but this is also not necessarily the case: by comparing the change in consumption-based emissions and economic growth we see that many countries have become much richer while achieving a reduction of emissions.

Net Zero

Net zero emission means that all man-​made greenhouse gas emissions must be removed from the atmosphere through reduction measures, thus reducing the Earth's net climate balance, after removal via natural and artificial sink, to zero.

This concept has grown in popularity, with many developed market firms setting net zero targets, with netting achieved primarily via the purchase of carbon offsets. Whilst this goes a long way in supporting emissions targets, this is only part of what is required. Greater emphasis needs to be placed on the reduction and replacement of emissions.

How can developed markets help to balance carbon inequality?

Consumption-based emissions reflect the consumption and lifestyle choices of a country’s citizens, this is what drives a significant portion of emissions generated in developing markets as we have seen above. Accordingly, these countries citizens have great influence to help address the emissions output globally. Some of the many practical ways this can be achieved is via:

  • Calculating one’s personal footprint – you may be surprised with the results!

  • Conscious consumption choices – for example, there is considerable evidence that reducing the consumption of meat has significant environmental benefits

  • Focusing on reusing or recycling goods rather than discarding

  • Replacing high emissions activities with lower – e.g. can one walk or cycle to work vs. drive?

  • Championing reduction and replacement activities with their employers

  • Actively lobbying investment firms who manage their capital (e.g. savings, pensions etc.) to adapt their investment strategies to directing capital to “greener” investments (in both developed and emerging markets) and provider greater transparency of their activities

  • Whilst individually, our savings might be small, collectively we can make a change.

For example, at Qbera Capital, we so far this year, we have conducted a detailed review of our emissions footprint, as well as identified reduction and replacement actions that are now being implemented. To learn more about what we are doing, feel free to contact us.