Should carbon-exporting countries strive for consumption-based accounting in a global cap-and-trade regime?

Abstract

In the context of the post-Kyoto policy debate, the question was raised whether the current practice of production-based emissions accounting should be replaced by a consumption-based approach. In this paper, we qualify the conditions under which the way of carbon accounting makes a difference, and show how this affects the incentive of countries to opt for one or the other alternative. Two main insights are presented: First, it is emphasized—and formally shown with a general equilibrium trade model—that the way of accounting has neither efficiency nor distributive effects in the presence of a global cap-and-trade regime with full coverage and given national emission caps. Second, the accounting scheme does matter whenever the initial allocation rule for emission rights is related to past emissions. However, for a net exporter of carbon such as China, the preference for one or the other turns out to be ambiguous, since the current production-based accounting would be favored under grandfathering, whereas consumed carbon would be the preferred measure whenever higher current or historic emissions imply a lower initial allowance, as e.g. under the principle of historical responsibility.