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Embodied energy in trade: What role does specialization play

About the project 

The goal of this research project is to investigate how the embodied energy in trade influences energy use and productivity for each country. An understanding of each country’s embodied energy trade can enable better comparisons of energy indicators between countries, allowing for a more efficient design of energy policy targets. In line with KAPSARC’s overall objectives, this research project seeks to provide insights to policymakers that can be used to inform energy and environmental policy at both a national and an international level.

Summary

In global discussions aimed at limiting greenhouse gas emissions, the national targets set by governments are tied to the energy used or emissions generated within national borders. However, international trade can confuse the accounting. Moving a factory across the border does not change the total emissions, only the country to which they are attributed. Because of this, there is a growing consensus that the embodied emissions in international trade may undermine efforts to mitigate climate change.

This has led to a number of studies that investigate the embodied emissions in international trade. Their findings have consistently demonstrated that industrialized countries tend to be net importers of embodied energy and emissions, while developing countries tend to be net exporters. It is often assumed that the industrialized countries have “offshored” energy intensive industries to developing countries, which in turn have specialized in energy intensive production.

Some countries have started to adopt national targets around energy productivity, an indicator that links energy use to gross domestic product. Energy productivity has recently gained increased interest because it accommodates economic growth, is conceptually tied to energy efficiency - seen by policymakers as a low cost solution to limiting emissions - and focuses attention on how to maximize the welfare extracted from the energy system.

We examine the issue of offshoring and specialization through the lens of embodied energy. First, we calculate the embodied energy in the net exports of 41 economies. We then decompose the embodied energy in net exports for each economy into three effects - intensity, specialization, and the trade balance - to reveal why each economy is a net exporter or importer of embodied energy. Each effect is described below:

-The intensity effect loosely reflects how differences in energy efficiency influence the embodied energy in a country’s net exports. For example, consider two countries that engage in the trade of steel. Suppose each country is exporting the same volume of steel to the other. One of the countries would be a net exporter of embodied energy if it was less efficient in production, as its steel exports would embody more energy than its steel imports. 

- The specialization effect captures how differences in the mix of goods and services that are traded influence the embodied energy in net exports. For example, if Saudi Arabia is exporting petrochemicals to the USA and importing various food products, then Saudi Arabia would be a net exporter of embodied energy due to its much more energy intensive exports. 

- The trade balance effect reflects how differences in the volume of exports and imports influence the embodied energy in net exports. Returning to the steel example and allowing both countries to be equally efficient at producing steel, if one country exports ten tonnes of steel and imports five tonnes from the other country, the former will be a net exporter of embodied energy because of that trade surplus.

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