Haver Analytics
Haver Analytics


Shashwat Indeevar

Publications by Shashwat Indeevar

  • In discourse about CO2 emissions, the focus is often on the emissions resulting from the production of goods. Many countries have made great strides in bringing down their emissions from production. For instance, according to EDGAR data, the United States has cut its emissions from manufacturing and construction in half over the past 50 years. Likewise, many European countries, including Germany, have made even more dramatic cuts in their emissions from goods production. While this is certainly a step in the right direction, it appears that these statistics overstate the progress in lowering emissions and mask underlying developments that make real cuts more difficult.

    The fact is, major economies are able to outsource their production of goods while maintaining high consumption. This is highlighted by the US trade deficit of over $1 trillion per year in 2021 to 2023. While the trade deficit is less than 5% of the US GDP, the composition of the deficit is heavily weighted towards goods, which entails a disproportionate amount of emissions in production. The tendency to outsource goods production makes US and EU emissions figures look better than they are and emissions figures from countries like China and other Asian nations look worse. IMF data showing CO2 emissions embodied in US trade vs US production emissions highlight the problem (see Figure 1). Total emissions produced in the US have drifted down in the past decade, but the jump in trade in the past three years has offset that improvement. Not only has this development skewed worldwide emissions figures, it has pushed production to parts of the world where emissions standards are lax. However, a focus on emissions from the consumption of goods rather than production presents an alternative view in finding solutions to tackle climate change.

    The main idea is that demand for, not production of, carbon-rich products drives emissions. If no one wanted to buy the product, no one would produce it. The US and European nations have been importing more and more goods, which are heavy in carbon content, and therefore avoiding some production of emissions. But the emissions are being produced nevertheless. To put the figures in perspective, according to the IMF emissions embodied in trade data, the amount of emissions the US imported was nearly as great as all emissions produced in India, with its 1.4 billion people. By our estimates, trade accounts for about a quarter of all emissions from US demand.

    Both importing and exporting nations benefit from trade in these goods. Those countries that are exporting goods to the US and Europe enjoy a comparative advantage, which means they can produce them at lower cost. However, part of the comparative advantage may be the ability to pollute without political ramifications. No doubt, the production processes employed to make the products abroad entail more emissions than if they were produced domestically. We can see this by comparing US NIPA data with the emissions in trade data. In 2021, the US imported $2.842 trillion worth of goods and that accounted for 2,243 million metric tons of CO2. Meanwhile, the US exported $1.746 trillion worth of goods and that accounted for 627 million metric tons. So, US imports were 63% higher, but emissions from US imports were 258% higher. The carbon content of the products the US imports is much greater than the carbon content of the products the US produces for export.

    So what can be done about this? The focus on consumption offers a solution using leverage from trade. Worldwide emissions from manufacturing can be reduced through carbon taxes on end consumers in United States and Europe, and subsidies for products that already have adopted cleaner processes. This would evade a damaging trade war as the tax would apply to all goods irrespective of country of origin. A carbon tax on consumption likely would impact producers, creating an economic incentive to producers everywhere to reduce emissions. Those countries that produce with heavy carbon footprints would have the most incentive to find innovative solutions in their manufacturing and production processes or alternatively use green energy. The higher price consumers pay would align better with the true costs to society for these products. On the government side, the US federal government, being one of the largest purchasers in the world, is already aiming to make federal procurement net zero carbon emissions by 2050 as a part of its sustainability goals.

  • The US has mandated that light vehicles become much more efficient in coming years in an effort to lower greenhouse gas emissions. For example, light vehicles will be required to average nearly 50 miles per gallon across automaker production by 2026. The requirements are set to become even more stringent thereafter, with the ultimate goal of pushing automakers toward an all-EV fleet in coming decades. However, as a practical matter, there are increasing costs to driving emissions to zero. The improvements in fuel efficiency for many models are reaching diminishing returns, so the benefit to the environment of further gains is minimal. In addition, the country is not ready for an all-EV fleet. As EV production ramps up, the costs of needed raw materials will skyrocket, driving up vehicle prices.

    Policymakers could speed up progress toward lowering US gasoline usage and vehicle emissions with existing hybrid technology instead. To do this, policymakers would have to stop rewarding ever-higher miles per gallon for some models and instead focus on eliminating the worst gas-burning vehicles. This would bring down fuel usage in the meantime until the economy is readier for wide-scale EV production.

    Diminishing Returns. We have made a lot of progress for many vehicles that now get 33 to 50 miles per gallon. At 33 miles per gallon, it would take huge further gains to save little in terms of gasoline usage.

    Chart 1 shows miles per gallon on the horizontal axis and the corresponding gallons used to drive 100 miles on the vertical axis. By basing estimates of fuel efficiency on miles per gallon gauges, the gains seem much bigger than they are. As fuel efficiency rises – measured by miles per gallon – the fuel savings decline.