Low Carbon Economy, 2013, 4, 14-23
Published Online December 2013 (http://www.scirp.org/journal/lce)
Open Access LCE
The Effects of China-EU Trade on CO2 Emissions
Hui Zhou, Jie Cao, Jichuan Sheng
School of Economics and Management, Nanjing University of Information Science & Technology, Nanjing, China.
Email: zhouhui966@163.com, cj@amss.ac.cn, shengjichuan@gmail.com
Received August 1st, 2013; revised September 1st, 2013; accepted September 10th, 2013
Copyright © 2013 Hui Zhou et al. This is an open access article distributed under the Creative Commons Attribution License, which
permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
Production for internation al trade has played an important role in driving the rapid increase of Chinese CO2 emissions.
This paper uses input-output analysis to quantitatively estimate the effect of the bilateral trade between China and its
present largest trading partner, the European Union (EU), on both national and global CO2 emissions. The results show
that under the bilateral trade, China’s emissions from 2002 to 2008 increased by 2458 MMT (6.64%), and the EU’s
emissions decreased by 539 MMT (1.81%). From a global perspective, the trade led to an increase of 1919 MMT CO2
in the world’s total emissions. The trading pattern is not dominated by pollution haven effect but by the comparative
advantages in factor endowments. It is suggested that a consumer responsibility-based accounting system of national
CO2 inventory shou ld be introdu ced in replace o f the present p roduc er responsibility-b ased one. In order to ach ieve co st
efficiency in emissions reduction in the new accounting system, more CDM programs could be established.
Keywords: Carbon Dioxide Emissions; Trade between China and EU; Pollution Haven Hypothesis; Factor
1. Introduction
During the past ten years the total CO2 emissions of
China through consumption of energy have almost tri-
pled. China surpassed the United States and became the
world’s largest CO2 emitter beginning in 2007. Among
the main forces of driving Chinese CO2 emissions, inter-
national trade plays an especially important role.
The bilateral trade between China and the EU almost
quadrupled, from 100 b illion euros in 2000 to 395 billion
euros in 2010. In 2006 China took the place of the USA
and became EU’s largest import partner.
However, the impacts of the bilateral trade between
the EU and China on CO2 emissions have not been stud-
ied extensively. Therefore, the first motivation of this
paper is trying to figure out the impacts of China-EU
trade on national and global CO2 emissions quantitatively.
Following the Shui and Harriss (2006) framework [1],
we want to answer the followin g three questions: 1) How
much the CO2 emissions for China changed because of
the China-EU trade? 2) What amount of CO2 emissions
changed for the EU due to the bilateral trade? 3) What is
the impact of the bilateral trade between China and the
EU on global CO2 emissions?
In addition to analyzing the effects of EU-China trade
on CO2 emissions, we want to further explore the reasons
behind the trade pattern. There are two major competing
theories concerning competitive advantages. The pollu-
tion haven h ypothesis (PHH) predicts that co untries with
relatively weak environmental policy, which are often
low-income countries, will specialize in dirty-industry
production. The major alternative to the pollution haven
hypothesis is that the direction of trade in dirty goods is
primarily determined by conventional determinants of
comparative advantage-factor endowments and differ-
ences in technology. This hypothesis can be called factor
endowments hypothesis and under it, the pollution-haven
effect is swamped by other motives for trade [2].
In the global warming case, as Annex I countries, the
EU was required by the Kyoto Protocol to achieve green-
house gas emissions reduction targets, which could rep-
resent an environmental competitive disadvantage. The
EU launched European Union Emissions Trading Sche-
me (EU ETS) in 2005 which now covers more than
10,000 installations with a net heat excess of 20 MW in
the energy and industrial sectors which are collectively
responsible for close to half of the EU’s emissions of
CO2 and 40% of its total greenhouse gas emissions. On
the other side, China is a non-Annex I country without a
binding target for CO2 emissions reduction. If PHH holds,
The Effects of China-EU Trade on CO2 Emissions 15
the EU has incentives to transfer energy-intensive indus-
tries to China, or to directly import energy-intensively
produced goods from China in order to reduce domestic
carbon emissions. Therefore, has China become the “CO2
pollution haven” for the EU, or was the trade mainly
driven by endowment facto rs? This is th e second motiva-
tion of this paper and in order to an swer this qu estion, we
will: 1) identify the pattern of the bilateral trade between
China and EU; and 2) testify the pollution haven hy-
pothesis for the carbon intensive sectors.
According to the above research aims, the rest of the
paper is organized as follows: Section two reviews recent
literatures on the topic; section three introduces the
methodologies, including input-output analysis and the
indicator for PHH; sector four presents the data sources;
section five proposes the main results; section six makes
discussions on carbon leakage and the trade driving
forces; and section seven concludes the paper.
2. Literature Review
Many studies show that China is a net exporter of energy,
and the energy embodied in exports tends to increase
over time, which is driven by the consumptions in the
developed world. Wang and Watson (2007) make an ini-
tial assessment of the emissions from the goods and ser-
vices that China exported in 2004, concluding that the
net exports from China accounted for 23% of its total
CO2 emissions. It supports the argument that the steep
rise in China’s emissions has been fueled by exports of
cheap goods from its factories to western consumers [3].
Weber, et al. (2008) find that in 2005, around one-third
of Chinese CO2 emissions (1700 Million Metric Tons,
MMT) were due to production of exports, and this pro-
portion has risen from 12% (230 MMT) in 1987 and only
21% (760 MMT) as recently as 2002 [4]. According to
the estimation of Guan, et al. (2009), half of China’s re-
cent increase in carbon emissions has been driven by its
production of goods for export—60% of which went to
wealthy OECD states [5]. Lin and Sun (2010) show that
about 3357 MMT CO2 emissions were embodied in the
exports of China while the emissions avoided by imports
were only 2333 MMT in 2005, implying that China was
a net exporter of CO2 emissions [6].
There are other studies focusing on the carbon emis-
sions embodied in bilateral trade between China and its
top trading partners. The most relevant one is Yang et al.
(2011) which also study the impact o f China- EU trade on
climate change. They find out that the EU has outsourced
its own emissions to an extent of ca 13.6% of its total
energy-related CO2 emissions (2006/7) and the emissions
embodied in China-EU trade were very imbalanced [7].
As for China and the US, about 7% - 14% of China’s
CO2 emissions were a result of producing exports for US
consumers during 1997-2003. US CO2 emissions would
have increased from 3% to 6% if the goods imported
from China had been produced in the US [1]. The de-
composition analysis of embodied CO2 emissions in the
trade between China and Japan reveals that the growth of
exports (or activity change) had a large influence on the
growth of embodied CO2 emissions during 1990-2000
[8]. Liu, et al. (2010) point out that the exported CO2
emissions from China to Japan greatly increased in the
first half of the 1990s and had reduced from 1995 levels
by 2000 [9]. It is estimated that through trade with China,
the UK reduced its CO2 emissions by approximately 11%
in 2004, compared with a non-trade s c e n ar io in which the
same type and volume of goods were produced in the UK
On the PPH, empirical evidences are mixed. Some stu-
dies prove the existence of pollution havens. A study on
Italy verifies that as a Kyoto and European Emissions
Allowance Trading Scheme (EATS) complying country,
evidence of a change in the trade patterns occurred on the
basis of the PPH does exist [11]. Cole (2004) finds evi-
dence of pollution haven effects, using detailed data on
North-South trade flows for pollution intensive products,
but such effects do not appear to be widespread and ap-
pear to be relatively small compared to the roles played
other explanatory variables [12]. Using a new dataset on
the stringency and enforcement of environmental policy,
Kellenberg (2009) is the first to find robust confirmation
of a pollution haven effect in a cross-country context by
accounting for strategically determined environment,
trade, and intellectual property right policies [13].
However, some studies reject an association between
environmental regulation and trade in dirty industries.
Liddle (2001) find that the benefits of trade can be either
positive or negative depending on country endowments,
but their results do not support the pollution haven hy-
pothesis [14]. Kearsley and Riddel (2010) reject the PHH
because they find only very weak statistical evidence that
dirty imports are correlated with higher emissions [15].
Dietzenbacher and Mukhopadhyay (2007) find out that
the gains from trade have increased comparing 1996/
1997 with 1991/1992, indicating that India has moved
further away from being a pollution haven [16].
3. Methodologies
3.1. The Input-Output Framework
This paper first seeks to calculate the CO 2 emissions em-
bodied in imports and exports. The embodied CO2 emis-
sion of a product is an accounting methodology which
aims to find the sum total of the carbon emissions in an
entire product lifecycle. This lifecycle includes raw ma-
terial extraction, transport, manufacture, assembly, in-
stallation, disassembly, deconstruction and/or decompo-
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The Effects of China-EU Trade on CO2 Emissions
The input-output analysis (IOA), which was first de-
veloped by Wassily Leontief in 1936, is adopted in this
paper for the purpose of estimating embodied emissions.
Since the IO table is able to capture indirect environ-
mental impacts caused by upstream production, it has
frequently been used to analyze the emissions embodied
in goods during the last few decades.
Assuming that an economy includes n industries, the
equation can be represented as:
Ax y. (1)
Where x is a column vector representing the total out-
put of the entire economy. x is decomposed into two
parts, the intermediate input for producing the total out-
put, which is Ax, and the final demand, which is y. A is
the direct requirement coefficients matrix, whose element
aij (i, j = 1, … n) represents the amount of input from
industry i required directly in order to produce one unit
of output from industry j. The final demand y in the IO
model includes household consumption, government
consumption, investment and net export.
The relationship between the final demand y and the
total output x can be represented as:
IA y
 . (2)
is called the Leontief inverse matrix,
which is also called the cumulative demand coefficients
matrix. Its element represents the amount of demand
from industry i required directly and indirectly to pro-
duce one unit final demand from industry j.
The emissions C embodied in the final demand y is:
 . (3)
Where E is a row vector representing the coefficients
of direct CO2 emissions per unit output by sector.
repr esents the coefficien ts matrix of cumula-
tive CO2 emissions per unit output by sector.
According to this framework, the amount of the avoid-
ed CO2 emissions in the EU by importing goods from
China is:
 
. (4)
Where: EEU is the coefficients vector of the EU’s di-
rect CO2 emissions per unit output and
represents the coefficients matrix
of cumulative emissions per unit outpu t in the EU. yCE is
the vector of the Chinese exports to the EU .
The CO2 emissions embodied in the production of the
exports from China to the EU are:
 
. (5)
Where: EC is the coefficients vector of the China’s di-
rect CO2 emissions per unit output and
represents the accordingly coefficients matrix of cumula-
tive emissions per unit ou tput in China.
On the other hand, the amount of avoided CO2 emis-
sions in China by importing fro m the EU is:
 
. (6)
Where: yEUE is the vector of the EU exports to China.
The CO2 emissions embodied in the production of the
exports from the EU to China are:
 . (7)
In summary, the amount of CO2 emission change of
China compared to a non-trade scenario is the difference
between the emissions embodied in the exports to the EU
and the avoided emissions embodied in the imports from
EU, which is represented as:
. (8)
Similarly, the amount of CO2 emission change of EU
because of bilateral trade is the difference between the
emissions embodied in the exports to China and the
avoided emissions embodied in the imports from China,
which is shown as:
. (9)
The world’s total CO2 emissions changes due to the
bilateral trade between China and the EU compared to
the non-trade scenario is:
 . (10)
For the results of (8)-(10), a positive value means an
increase of the emissions while the negative value im-
plies a decrease of the emissions.
3.2. Indications about the Pollution Haven
In this paper, the indicator of net export-domestic con-
sumption ratio is used to testify whether the pollution
haven hypothesis is true [11]. The indicator is defined as
the following:
 
NyyC k
. (11)
Where and
y, following the definition in
the preceding section, represent respectively Chinese
exports and imports of sector k toward or from the EU.
represents the domestic apparent consumption of
the products of sector k in China, which is obtained
 
. (12)
Where is the domestic total production of secto r
k in China.
and are total import and export
of sector k.
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The Effects of China-EU Trade on CO2 Emissions 17
If the indicator shows an increasing trend, the PHH
may occur. On the converse, the PHH is rejected.
4. Data Sources
4.1. CO2 Emission factor for Chinese Industry
We follow the method proposed by [17] to construct EC:
the direct CO2 emissions coefficients vector in China.
The data of final energy consumption by sector were
collected from China Energy Statistical Yearbook (CE-
SY) 2008. In this database, the entire economy is catego-
rized into 44 sectors.
In addition, we use the latest-available version of the
Chinese input-output table of 2007 to acquire the basic
matrix. There are two categorizations in the input-output
table, which are 42 sectors and 135 sectors. However,
neither of them is in accordance with the 44-sector cate-
gorization in the CESY. So we made a match between
the 42-sector of input-output table and the 44-sector of
energy consumption, and re-categorized the entire econo-
my into 29 sectors, listed in the Appendix 1.
4.2. CO2 Emission Factor for EU Industry
EEU, the direct CO2 emissions coefficients vector in the
EU, is obtained through the E3IOT database, and the
avoided CO2 emissions in the EU and the embodied CO2
emissions for EU exports are calculated using the Chain
Management by Life Cycle Assessment (CMLCA) soft-
ware. Both the database and the software were developed
by the Institute of Environmental Sciences of Leiden
University, the Netherlands. The CMLCA is a software
tool that supports the calcula tion of input-output analysis
(IOA), including environmental input-output analysis
(EIOA). The E3IOT database contains a high resolution,
environmentally extended input-output table for Europe
which covers production, consumption and waste man-
agement sectors. It can be assumed to give a good esti-
mate of total emissions and resource use (mostly fossil
energy) related to final consumption in the EU-25 [18].
Because of lack of officially released input-output table
of the EU, E3IOT database can serve as the best alterna-
tive for the purpose of environmental extended input-
output analysis of the EU in this paper.
4.3. Trade Data and Aggregation
Because the E3IOT database was developed based on the
area of EU-25, we focused on the trading between China
and the EU-25. Because of data availability, we chose the
study period to be 2002-2008. The data of bilateral trade
between China and EU-25 during this period were ob-
tained from the eurostat website of the European Com-
All the original trading data are in the form of a Har-
monized System (HS) which divides the trading goods
into 98 categories. In order to calculate the CO2 embod-
ied in Chinese exports to the EU , we ma de a ma t c h o f the
HS category with the 44-sector categorization in the
Chinese input-output table, according to Appendix 4 of
the Input-Output Tables of China 2007, and then aggre-
gated them into the 29-sector category.
On the other hand, in E3IOT datas et al most 500 pro-
duction sectors are distinguished, based on the input-
output table of the US. Therefore, in order to calculate
the CO2 embodied in EU exports to China, we matched
the EU exporting data in the HS category into the E3IOT
category according to the Table of Concordance Between
2002 Input-Output Commodity Codes and Foreign Trade
Harmonized Codes, which is available in the Bureau of
Economic Analysis website in the US.
4.4. Data for Calculating PHH Indicator
The data of total imports and exports of Chin a from 2002
to 2008 were collected from the International Trade
Center website. The data of sector productions and in-
vestments of China were collected from the China Statis-
tical Yearbook 2003-2009. We used the exchange rates
and the consumer price index (CPI) to convert the trading
values, the productions and investments between years
into a 2007 constan t price RMB value.
5. Results
5.1. The CO2 Emissions Embodied in Chinese
Exports to the EU
In 2002, China exported goods to the EU for about 90
billion euros. This number increased steadily to 245 bil-
lion euros in 2008. In order to produce the goods ex-
ported to the EU, China emitted large amount of CO2.
The carbon emission embodied in the Chinese exports to
the EU was 250 MMT in 2002 (7.21% of the total Chi-
nese emissions in that year) and reached 769 MMT
(12.30%) in 2007 (shown in Figure 1). The emission
went down to 758 MMT in 2008. However, the percent-
age of the CO2 emissions produced due to exports to the
EU (referred to as EEE) to the total Chinese emissions
decreased more rapidly than that of the EEE itself. This
is because although the exports to the EU from China
declined in 2008 due to the global economic downturn,
the total Chinese emissions kept going upward during the
same period. From 2002 to 2008 the accumulated CO2
emissions in China attributed to producing exports to the
EU were 3736 MMT, about 10.09% of the Chinese total
5.2. The Avoided CO2 Emissions in the EU
through Importing from China
According to our estimation, through importing from
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The Effects of China-EU Trade on CO2 Emissions
China, the avoided CO2 emissions in the EU increased
from 69 MMT in 2002 (1.67% of the EU total emissions
in that year), to 185 MMT (4.41%) in 2008 (shown in
Figure 2). During the period 2002-2008, the total
avoided CO2 emissions in the EU added up to 889 MMT.
This means that if all the imported goods had been pro-
duced in the EU instead of in China, the total CO2 emis-
sions of the EU would have increased by 889 MMT,
about 2.99% of the EU emissions in that period.
5.3. The CO2 Emissions Embodied in EU
Exports to China
The exports of EU to China more than doubled from 35
billion euros in 2002 to 78 billion euros in 2008. The
CO2 emissions embodied in these exports increased ac-
cordingly. In 2002 the CO2 emissions embodied in the
exports from EU to China were 31 MMT, accounting for
0.75% of the total EU emissions. It climbed to 67 MMT,
which was 1.60% of the total in 2008 (shown in Figure
5.4. The Avoided CO2 Emissions in China
through Importing from EU
China avoided CO2 emissions through importing goods
from the EU. The amount increased steadily from 99
Figure 1. The CO2 emissions embodied in Chinese exports
to the EU, 2002-2008.
Figure 2. Avoided CO2 emissions in the EU for imports
from China, 2002-2008.
MMT in 2002 to 241 MMT in 2008. The percentage of
the avoided to the total Chinese CO2 emissions fluctuated
around 3.5% most of the time in this period (shown in
Figure 4). If China had produced these goods instead of
importing them from the EU, the total emissions in
2002-2008 would increased by 1277 MMT, about 3.45%
of the Chinese emissions in that period.
5.5. The Impact of Bilateral China-EU Trade
on National and Global CO2 Emissions
Through bilateral trade between China and the EU, China
had a trade surplus increasing from 55 billion euros in
2002 to 167 billion euros in 2008. The CO2 emissions
embodied in Chinese exports to the EU are much larger
than those embodied in Chinese imports from the EU,
which makes China a net CO2 exporter. If we call the
difference of these two amounts the “CO2 trade surplus”,
the EU had a considerable CO2 trade surplus from trad-
ing with China, increasing from 219 MMT in 2002 to
708 MMT in 2007 and decreasing to 691 MMT in 2008
(shown in Figure 5).
Chinese CO2 emissions kept increasing during the re-
cent decade, in which international trade played an im-
portant role. If China had not produced exports for the
EU from 2002-2008, the total CO2 emissions would have
Figure 3. The CO2 emissions embodied in EU exports to
China, 2002-2008.
Figure 4. Avoided CO2 emissions in China for imports from
the EU, 2002-2008.
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The Effects of China-EU Trade on CO2 Emissions 19
decreased by 3736 MMT, about 10.09% of the Chinese
total emissions. If China had not imported goods from
the EU, the total CO2 emissions would have increased by
1277 MMT, about 3.45% of the total emissions during
this period. Therefore, trading with the EU increased
Chinese total CO2 emissions (as Figure 6 shows) by
2458 MMT, which was 6.64%, fro m 20 02 to 2008.
On the other hand, if the EU had produced the same
amount of products domestically, instead of importing
from China, the total emissions of the EU would have
increased by 889 MMT, about 2.99% of the EU emis-
sions from 2002 to 2008. Producing goods for exporting
to China resulted in an increase of CO2 emissions of 350
MMT, or 1.18% of the EU emissions. Thus trading with
China decreased EU total CO2 emissions (as Figure 7
shows) by 539 MMT, which was 1.81%, from 2002 to
Therefore the bilateral trade between China and the
EU had an obviou s impact upon national CO2 emissions,
increasing China’s emissions and decreasing the EU’s
emissions. From a global point of view, China-EU trade
increases global CO2 emissions. According to our esti-
mation, the bilateral trade between China and the EU
actually increased the global CO2 emissions by 1919
MMT from 2002-2008.
Figure 5. Commodity and CO2 trade surplus of China and
the EU, 2002-2008.
Figure 6. The influence of EU-China trade on China’s emis-
5.6. Identification of Carbon Intensive Sectors
First, the direct CO2 emissions coefficients of the 29
sectors of China are calculated following the way pro-
posed by [17]. Then the accordingly coefficients of the
cumulative emissions per unit output in China are ob-
tained using the Chinese Input-Output Table 2007. The
carbon intensive sectors are identified as the ten sectors
with highest cumulative CO2 emission factor (which are
shown in Table 1), excluding those that have not been
involved in th e bilateral trade with the EU.
5.7. Trade Pattern of the Carbon Intensive
The values of exports of the ten carbon intensive sectors
to the EU kept increasing from 28 billion euros in 2002
to 84 billion euro s in 2008, at an average annu al increas-
Figure 7. The influence of EU-China trade on EU’s emis-
Table 1. The most carbon intensive sectors and their cumu-
lative CO2 emission factors.
RankSector (Code) CO2 emission
factor (kgCO2/yuan)
1Manufacture of Non-metallic
Mineral Products (13) 0.6404
2Mining and Processing of Metal Ores (04) 0.5440
3Smelting and Pressing of Metals (14) 0.4886
4Mining and Washing of Coal (02) 0.4812
5Chemical Industry (12) 0.4542
6Manufacture of Metal Products (15) 0.4332
7Mining and Processing of
Nonmetal Ores and Other Ores (05) 0.3920
8Processing of Petroleum, Coking,
Processing of Nuclear Fuel (11) 0.3894
9Manufacture of Electrical
Machinery and Equipment (18) 0.3477
10 Manufacture of General Purpose and
Special Purpose Machinery (16) 0.3463
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The Effects of China-EU Trade on CO2 Emissions
ing rate of 20%. The carbon intensive exports from
China accounted for 31.27% of the total exports to the
EU in 2002, and this ratio decreased to 29.76% in 2005.
It climbed to the peak of 34.19% in 2007 and stayed al-
most unchanged in 2008 (shown in Figure 8).
In order to further show the trade pattern of the carbon
intensive sectors, export-import ratio of the 10 carbon
intensive sectors from 2002 to 2008 are calculated (listed
in Ta ble 2 ). If the export-import ratio of a sector is larger
than one, i.e., the exports of this product are larger than
the imports, it means that this country is a net-exporter in
this product. On the contrary, a less-than-one export-im-
port ratio implies that the country is net-importer in this
In general, China has been a net-exporter to the EU in
carbon intensive products. From Table 2 we can see that
the export-import ratios of the total carbon intensive sec-
tors from 2002 to 2008 were larger than one. Concretely
speaking, eight sectors out of ten have larger-than-one
export-import ratios during the study period, meaning
Figure 8. Exports of the carbon intensive sectors from
China to EU.
Table 2. The export-import ratio of the carbon intensive
Sector code 2002 2003 20042005 2006 20072008
13 4.08 4.62 4.998.17 8.17 8.607.90
04 16.21 18.01 21.258.20 4.81 2.804.61
14 0.54 0.42 0.630.65 1.31 2.522.18
02 385 273 173103 49 33 33
12 2.13 2.05 1.952.10 2.10 2.112.07
15 5.87 5.14 5.666.36 6.42 6.797.05
05 1.07 1.03 1.091.06 1.01 1.091.31
11 2.62 4.75 8.887.79 2.51 3.292.44
18 3.27 3.05 3.443.52 3.22 3.373.06
16 0.42 0.41 0.410.53 0.61 0.810.79
Total carbon
intensive sectors 1.43 1.36 1.421.61 1.69 1.971.85
larger exports than imports. This trading pattern plays an
important role in explaining the huge gap between the
CO2 emissions embodied in the Chinese exports and
those in the EU exports, which is clearly shown in sec-
tion 5.1 - 5.5. However, we would like to further ask how
this trading pattern is determined? Is it dominated by the
difference in the stringency of climate change policies,
i.e., PHH effect, or by the difference in factor endow-
5.8. Tendency of the PHH Indicator of Carbon
Intensive Sectors
The purpose of this section is to testify whether there
exist some changes in the production of the carbon inten-
sive sectors, on the basis of PHH. The values of the net
export-domestic consumption ratio for the carbon inten-
sive sectors in China from 2001 to 2009 are calculated.
The changing tendencies of their PPH indictors are
shown in Figure 9.
Among the ten carbon intensive sectors, there are six
Figure 9. Tendency of the PHH indicator of carbon inten-
sive sectors.
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The Effects of China-EU Trade on CO2 Emissions 21
sectors, Mining and Processing of Metal ores, Mining
and Washing of Coal, Manufacture of Electric Machin-
ery and Equipment, Processing of Petroleum, Coki ng ,
Processing of Nuclear Fuel, Manufacture of Non-metal-
lic Mineral Products and Chemical Industry, showing
decreasing trend of a regression line. So for these sectors,
PHH is excluded.
The other four sectors show an increasing trend. We
further calculate their t-statistic values of the trend coef-
ficients, which are 3.985, 2.97 2, 1.805 and 0.890 respec-
tively. The critical values of one-side hypothesis testing
for 1%, 5%, and 10% significance level are 4.297, 3.250
and 2.821 (for n = 9). Therefore, we can only reject the
null hypothesis “There is no PHH” at 5% significance
level for one sector, Manufacture of General Purpose
and Special Purpose Machinery, and reject the null hy-
pothesis at 10% level for the sector of Manufacture of
Metal Products. For these two sectors, the PHH is veri-
fied. However, for the other two sectors, the increasing
trend is not significant enough to provide reliab le indica-
tions to support PHH.
In a word, according to Figure 9, we can only find
evidence supporting the existence of PHH in two sectors
out of ten. In addition , these two sectors rank 10th and 6th
with their cumulative CO2 emission factors in the ten
carbon intensive sectors (see Table 1), i.e., they are not
the most carbon-intensive sectors.
6. Discussion
6.1. Pollution Haven or Factor Endowments?
China and the EU differ much in both their pollution
policy and in their factor endowments. Compared with
China, the EU is both capital abundant and has stricter
CO2 emissions targets. EU’s stringent CO2 mitigation
policy may tend to make it a dirty-good importer, but its
capital abundance tends to make it a dirty-good exporter .
The pattern of the bilateral trade depends on which of
these effects is stronger.
The results in section 5.8 provide very weak supports
for the PHH. It is indicated that for most of the carbon
intensive sectors, differences in the stringency of envi-
ronmental regulations between EU and China do not
provide the latter with a significant comparative advan-
tage in carbon intensive production and not drive China
the pollution haven for the EU. On the contrary, factor
endowments such as labor and capital have played a
much more dominant role. It should be the lower cost of
the Chinese labor and the more abundance of the EU
capital that form the main comparative advantages in
factor endowments and thus determine the structure of
the trading patterns b etween China and EU.
6.2. Policy Implications
We have shown in th e previous sections that th e bilateral
trade between China and EU has actually increased the
global emissions. How to change this situation with rea-
sonable and feasible po licies?
International trade has made consumption and produc-
tion spatially separated possible. However, a question
arises that which party should be responsible for the pos-
sible pollutions of the production. In the case of climate
change, the present accounting system of the national
emissions inventories has clearly represents the principle
of producers. The United Nations Framework Conven-
tion on Climate Change (UNFCCC) defines the national
emissions inventories to “include all greenhouse gas
emissions and removals taking place within national (in-
cluding administered) territories and offshore areas over
which the countr y has jurisdiction” [19 ].
This way of responsibility allocation has worsened the
problem of climate change. Kyoto Protocol, the most in-
fluential international climate change agreement, set
emission targets to Annex I countries, which are devel-
oped countries. In order to achieve their targets, they
have incentives to shift their emissions, in the ways of
international trade and direct investment, to the develop-
ing countries that are not subject to binding targets. This
is referred to as “carbon leakage”.
As Adam Smith says “Consumption is the sole end
and purpose of all production” [20], we should recon-
sider the emissions accounting methods. If the responsi-
bility of emissions is assigned to consumers, great
change of the national emissions inventories will occur.
The emissions of the developed countries like the EU
will be increased and their responsibility of emissions
reduction will be enlarged.
However, since the marginal CO2 abatement costs are
in general much higher in the developed countries than in
developing countries, it will be cost inefficient if the de-
veloped countries try to abate the emissions within their
territory borders. Therefore, the cost efficient solution for
this problem should be letting the dev eloping countries to
reduce the embodied emissions in carbon intensive ex-
ports under the technical/financial support in clean pro-
duction from the developed countries. In a policy per-
spective, we advocate that more programs in the form of
Clean Development Mechanism (CDM) be applied.
7. Conclusions
In this paper we have focused upon the impact of bilat-
eral trade between China and the EU on both national
and global CO2 emissions and try to verify whether the
trading pattern is dominated by pollution haven effect or
factor endowments. Because of the bilateral trade,
China’s emissions from 2002 to 2008 increased by 2458
MMT (6.64%), and the EU’s emissions decreased by 539
MMT (1.81%). The trade increased the world’s total
emissions by 1919 MMT, which worsens the problem of
Open Access LCE
The Effects of China-EU Trade on CO2 Emissions
global warming. However, the trading pattern is not
mainly determined by the difference of the stringency of
climate change policies, but by the comparative advan-
tages in factor endowments.
In order to reduce the increased emissions caused by
international trade, we propose a fundamental change of
the accounting system of the national emissions invento-
ries and allocate the responsibility of emissions to the
consumers in replace of the producers. Furthermore, in
order to simulate a cost efficient way of CO2 emissions
reduction under the new accounting system, we propose
that more CDM programs be established to help the de-
veloping countries increase their energy efficiency in
production techniques and thus reduce the emissions in
their exports to the dev eloped countries.
We notice that Yang et al. (2011) have studied the
similar topic and get similar results that the emissions
embodied in China-EU trade are very imbalanced. How-
ever, our research differs from theirs in several ways.
First, we cover more countries (EU-27 compared to EU-
15) and use a higher resolution in sector classifications
(29 sectors compared to 15 ones); second, in addition to
analyzing the impact of China-EU trade on CO2 emis-
sions, we further detect the main driving force that lies
behind the trading pattern; third, we make different pol-
icy implications. We share the same idea with Yang et al.
(2011) that a new consumer-based accounting system
should be implemented. However, we suggest that by
using CDMs instead of a cap-and-trade system, the dif-
ficulty of including the developing countries and allocat-
ing the initial emissions certificates to them could be
Besides, we do not agree with one alternative that is
proposed by Yang et al. (2011) that the EU could intro-
duce tariffs on CO2-intensive Chinese imports to main-
tain the status quo. The rationality of imposing carbon
tariffs on Chinese imports is to eliminate the difference
in the stringency of the climate change regulations be-
tween China and the EU. However, we have shown in
our study that the trading pattern is actually not domi-
nated by the pollution haven effect, but by the compara-
tive advantage in factor endowments. Therefore, it will
be fundamentally distortive to use the carbon tariffs in
order to correct the trad ing pattern that is caused by labor
and capital endowments, l et al. one that this kind of in-
tervention might b e against the principles of free trading.
8. Acknowledgements
The author would like to gratefully thank Dr. James E.
Callaghan of Muskingum University and Professor Mo-
hammad M. Ashraf of University of North Carolina at
Pembroke in USA for helpful discussions and comments.
This research was supported by the Humanities and So-
cial Sciences Funds of Ministry of Education (Grant
13YJC790225, Grant 13YJCZH148) and the foundation
of Nanjing University of Information Science & Tech-
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Appendix 1. Aggregated Sectors for Input-Output Analysis in China
Code Sector CodeSector
01 Farming, Forestry, Animal Husbandry, Fishery & Water Conservancy16Manufacture of General Purpose and Special Purpose Machinery
02 Mining and Washing of Coal 17Manufacture of Transport Equipment
03 Extraction of Petroleum and Natural Gas 18Manufacture of Electrical Machinery and Equipment
04 Mining and Processing of Metal Ores 19Manufacture of Communication Equipment,
Computers and Other Electronic Equipment
05 Mining and Processing of Nonmetal Ores and Other Ores 20Manufacture of Measuring Instruments and Machinery
for Cultural Activity and Office Work
06 Manufacture of Foods and Tobacco 21Manufacture of Artwork and Other Manufacturing
07 Manufacture of Textile 22Recycling and Disposal of Waste
08 Manufacture of Textile Wearing Apparel, Footwear,
Caps, Leather, Feather and Related Products 23Production and Distribution of Electric Power and Heat Power
09 Processing of Timber, Manufacture of Furniture 24Production and Distribution of Gas
10 Manufacture of Paper, Printing, Manufacture of
Articles For Culture, Education and Sport Activity 25Production and Distribution of Water
11 Processing of Petroleum, Coking, Processing of Nuclear Fuel 26Construction
12 Chemical Industry 27Transport, Storage, Postal & Telecommunications Services
13 Manufacture of Non-metallic Mineral Products 28Wholesale, Retail Trade and Catering Service
14 Smelting and Pressing of Metals 29Other service activities
15 Manufacture of Metal Products