In the 1990s, it became possible to link developed countries’ advanced technology with developing countries’ low-cost labor due to the remarkable development of information and communications technology, leading to the development of global value chains (GVCs).
GVCs involve many stages, including raw materials procurement, production, transportation and consumption, and those activities are conducted across national borders. GVCs have deepened the integration of the global economy and promoted economic growth by furthering the international division of labor. However, as the global economy is confronted with various problems, GVCs are also facing headwinds.
Global warming is one of the problems that need to be urgently addressed. In the development of GVCs, the top priority has been given to economic efficiency, but the focus has now turned to greenhouse gas emissions and responsibility for emissions. This article addresses discussions over the responsibility for greenhouse gas emissions in relation to GVCs.
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The discussions over emission responsibility include those concerning emissions at the national level and those concerning emissions at the firm level. Regarding emissions at the country level, the Kyoto Protocol, which was adopted at the Third session of the Conference of the Parties to the United Nations Framework Convention on Climate Change (COP3) in 1997 and which went into effect in 2005, set emission reduction targets for the first time.
The Kyoto Protocol was based on the idea that developed countries should exercise leadership in taking steps to reduce emissions because they are responsible for causing global warming. As a result, only developed countries and economies in transition were subjected to binding emission reduction targets. However, this approach created the “carbon leakage” problem, which refers to the phenomenon of the implementation of emission reduction measures taken by those countries leading to increases in emissions in developing countries which had not introduced emission regulations.
The Paris Agreement, which was adopted at COP21 in 2015 and went into effect in 2016, marked a step forward in that all countries, including developing countries, committed themselves to emission reduction targets. However, countries individually set target reduction volumes, target deadlines and the means of achieving those targets without significant international coordination. In this respect, the Paris Agreement is a retreat from the Kyoto Protocol.
One particular point of concern regarding emission responsibility at the country level is that emission reduction targets are based on the “producer responsibility” criterion. When goods produced in a certain country are exported, greenhouse gases emitted during production are attributed entirely to producing countries. Under the producer responsibility criterion, firms may shift their plants abroad or outsource their production to foreign firms in order to contribute to domestic decarbonization.
Meanwhile, the view has emerged that distortions caused by differences in decarbonization policies and GVC-related activity taken with no regard for decarbonization in pursuit of economic efficiency alone should be corrected through the carbon border adjustment mechanism (CBAM). For example, when goods covered by the European Union’s version of the CBAM are imported, the EU will require the payment of a fine commensurate with the volume of greenhouse gas emissions derived from the production of the goods, starting in 2026. If different countries introduce different, uncoordinated versions of the CBAM, economic friction and turmoil could occur. The possibility cannot be ruled out that CBAM is a disguised form of protectionism. It is also questionable whether CBAM is consistent with the rules of the World Trade Organization (WTO).
On the other hand, there is also a “consumer responsibility” criterion, which ascribes production-derived emissions entirely to consuming countries. However, this approach could eliminate the incentive for producing countries to reduce emissions, and it is difficult for importing countries to restrict emissions derived from overseas production. Recently, in consideration of the disadvantages of both the producer and consumer responsibility criteria, a hybrid criterion known as the “shared responsibility” criterion (roughly speaking, this approach ascribes emissions to producers and consumers on a weighted average basis) has been proposed.
I calculated the carbon dioxide (CO2) emission volumes of the world’s five largest emitters (China, the United States, India, Russia and Japan) based on the shared responsibility criterion with Haitao Cheng of Hitotsubashi University and others. Even under the shared responsibility criterion, the emission volumes of China and India have increased rapidly (see the figure). Our research also indicated that the responsibility attributed to each of China, India and Russia is overstated, while the responsibility attributed to each of the United States and Japan is understated. In other words, carbon leakage to China, India and Russia from other countries and from the United States and Japan to somewhere else is presumed to be occurring through international trade.
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Next, let us direct our attention to the discussions over emissions at the firm level. An increasing number of firms are aiming to decarbonize their business operations in order to realize a sustainable economy and society. Firms, particularly global enterprises that have developed GVCs, are disclosing decarbonization-oriented business strategies and setting decarbonization targets.
Those firms are not only promoting the appropriate use of resources, improving energy efficiency, and reducing emissions of greenhouse gases for themselves but also paying attention to suppliers’ decarbonization efforts. Hitachi Ltd. aims to reduce CO2 emissions from its overall supply chain by 50% (compared with fiscal year 2010) by fiscal year 2030 and achieve carbon neutrality (net zero CO2 emissions) by fiscal year 2050. Apple requires suppliers within its GVC to achieve decarbonization by 2030.
Firms must calculate and disclose the volumes of greenhouse gas emissions derived from GVC-related activities based on the classification of emissions into the three categories prescribed by the International Sustainability Standards Board, a subordinate body of the IFRS Foundation, which is responsible for setting international accounting standards. The three categories are direct emissions from the calculating firms themselves (Scope 1), indirect emissions associated with the use of electricity, heat and steam supplied by other firms (Scope 2), and emissions from other firms related to the calculating firms’ business activities (Scope 3).
Scope 3 emissions include those derived from the use and disposal of products. In September 2023, Apple announced the launch of apple watches with net zero emissions of greenhouse gases during their lifecycles, including production, transportation and usage by consumers. However, as the disclosure of Scope 3 emissions requires appropriate gathering of information on emissions from all suppliers, some firms may find it difficult to make such disclosures.
Some firms require their suppliers to disclose information on greenhouse gas emissions, including Scope 3 emissions, and select suppliers based on this information. This could lead to the reorganization of GVCs. Furthermore, even though firms manage to calculate their Scope 3 emissions, the larger the emissions, the heavier the burden on firms in terms of decarbonization. Hitachi Ltd.’s emission volume of greenhouse gases in fiscal 2019 came to 110 million tons in CO2 equivalents on a supply chain-wide basis, of which Scope 3 emissions accounted for 96% (Nikkei Shimbun, September 14, 2021).
Behind the ongoing information disclosure initiative concerning greenhouse gas emissions is growing interest in ESG (environmental, social and governance) investment. For investors who wish to identify firms’ climate change risk, information as to how much greenhouse gases is emitted in which parts of their GVCs is important.
Since April 2022, the Tokyo Stock Exchange has made it mandatory for firms listed on the Prime Market to disclose information based on the requirements set by the Task Force on Climate-related Financial Disclosures (TCFD). For their part, firms are starting to make efforts to demonstrate their identity as sustainable firms. This is communicated not only to investors but also to customers, suppliers and employees, for example by committing themselves to the Science Based Targets (SBT) initiative, which calls for the setting of targets for the reduction of greenhouse gases that are consistent with the levels required under the Paris Agreement, or by participating in RE100, an international initiative aiming to cover 100% of the energy needs of business activity with renewable energy.
In fact, not all firms are proactively engaging in the decarbonization initiative; however, firms have a more holistic view of the need to reduce greenhouse gas emissions across the entire lifecycle of their products. Even so, the largest incentive for firms to reduce emissions is related to securing and expanding business opportunities. It is important for the Japanese government, in cooperation with other countries, to develop an environment that encourages firms to reduce emissions.
>> Original text in Japanese
* Translated by RIETI.
December 21, 2023 Nihon Keizai Shimbun
