EU carbon emissions by multinational enterprises under control-based accounting

Abstract

The territory-based conception of environmental commitments disregards the crucial role of multinational enterprises (MNEs) in the global generation of greenhouse gases. Such a misconception discourages MNEs from pledging own emissions reduction goals as global agents and exempts their origin country of any responsibility for the emissions they generate abroad. We propose a new allocation criterion based on who has the ability to take MNEs’ decisions called the control-based accounting. We apply it for the first time to the MNEs’ foreign affiliates operating in the EU and estimate the CO2 emissions responsibility of EU countries under the control-based criterion, that is, assigning emissions generated by foreign-controlled companies to the origin country of the firms (controlling country) instead of the host country (as in the territory-based approach). We found that Germany and France are the EU countries with the highest control-based responsibilities; whereas Poland, the Czech Republic and Hungary bear significantly less responsibility under this approach compared to other allocation methods. The United States is the non-EU country with the greatest responsibility for emissions physically generated within the EU's territory through foreign affiliates. Targeting climate policies towards inducing parent companies and controlling countries to calculate and reduce the carbon footprint of their affiliates would place MNEs at the forefront of the fight against climate change.