Embodied carbon emissions in the supply chains of multinational enterprises

Abstract

Enterprises are at the forefront of climate actions and multinational enterprises (MNEs) engage in foreign direct investment (FDI), allowing them significant influence over the entire supply chain.Yet emissions embodied in MNEs international supply chains are poorly known. Here we trace the carbon footprints of MNEs foreign affiliates and show the gross volume of global carbon transfer through investment peaked in 2011, mainly driven by the decline in carbon intensity. Despite declining carbon footprints of developed country-based MNEs, there has been a significant increase in carbon transfer sourced from the Chinese mainland. We propose an investment-based accounting framework to allocate carbon footprints of MNEs to the investing country. Investment-based accounting of emissions could inform targeted and effective climate policies and actions. For instance, some large MNEs play a crucial role in carbon transfer, therefore their originating country should bear more responsibilities of carbon emission reduction as an investor. [143 words] In 2015, the Paris Agreement set the target of holding this century's global warming well below 2°44 C above pre-industrial levels. However, the sum of current national pledges and companies' commitments to climate mitigation falls short of meeting the Paris goal 1-3 . Global climate change mitigation calls for more active actions from governments, businesses and investors 4 . Currently, enterprises -particularly MNEs 5-7 -are at the forefront of climate action. For instance, thousands of US businesses have declared that they will continue to support climate action and work towards meeting the terms of the Paris Agreement 8 , despite President Trump's announcement that the US will withdraw from the Agreement. Carbon footprint measurement is the first step in reducing carbon emissions 9 . However, the global reach of MNEs makes it more difficult to measure their carbon footprints, especially the carbon footprint of their foreign affiliates, which is also a popular topic of current research 5 . This study attempts to enrich the related literature in the following ways.Here we present a comprehensive study to trace carbon emissions embodied in the supply chains of global MNEs. Existing studies mainly assessed the carbon footprints of MNEs originating in or hosted by a particular country in a certain year, such as China 10-12 or the US 5 . For instance, López et al. (2019) 5 found that in 2009 the carbon footprint of US MNEs' foreign affiliates was greater than that of the territorial emissions of the UK. Different economies around the world may play different roles in global investment networks, which have also been changing over recent years.This study extends the literature by providing time-series and global-level analysis of the carbon footprints of MNEs. We provide two methods, the decomposition method and the hypothetical extraction method (HEM) 13 , to calculate the carbon footprints of MNEs and prove that these two methods share the same results 14 . The results of these ca...

The dissemination of the “Shell sentence” and compliance with the Paris Agreement

“…The third scenario applies the reduction target to the total carbon footprint of MNE affiliates, accounting for those direct and indirect emissions embodied in the global production chain, both upstream and downstream, and avoiding double-counting 5 . Under this approach, MNEs directly generate only 41% of the emissions embodied in their extended carbon footprint, and the rest of the emissions (59%) are generated by domestic firms operating within the country.…”

“…where the term 𝒆 ̂ is the diagonalized matrix of the carbon intensity (emissions per monetary unit of output) for every sector, region, and firm type. Matrix 𝑩 𝑟 𝐹 is defined as the gross output of each sector required to produce per unit of output of the MNE hosted by country r and is calculated as 𝑩 𝑟 𝐹 = (𝑰 − 𝑨 + 𝑨 𝑟 𝐹 ) − Although Equations ( 2) and ( 4) are used in this study to estimate the carbon footprints of MNEs by host country using PFs and Zhang et al 5 .approaches, respectively, matrices 𝑪 ̅ and 𝑪 𝑟 ℎ𝑜𝑠𝑡 in those expressions allow us to identify the countries where MNE-related emissions are directly released. In addition, adding the emissions impact from all MNE affiliates (including their production chains) worldwide to one particular country provides the MNE's degree of influence on that country's emissions.…”

“…1 and 2 in the main manuscript are presented under this perspective to identify the influence of the MNEs on the reduction targets of a country's direct emissions. Using matrix 𝑪 ̅ , we compute the direct emissions in country 𝑘 related to the MNEs' PFs by summing the row elements of both firm types (𝐷 and 𝐹) in country 𝑘 that cross the columns corresponding to foreign-owned firms (𝐹) hosted by every country 𝑠, as follows: 𝑇𝑟𝑖𝑔𝑔𝑒𝑟𝑒𝑑_𝐷𝑖𝑟𝑒𝑐𝑡(𝑃𝐹) 𝑘 = ∑ ∑ 𝑪 ̅ 𝑘𝑠 𝑞𝐹 𝑞 𝑠 (5) with 𝑞 = 𝐷, 𝐹 and 𝑘, 𝑠 = 1, … , 𝑛. Taking India as an example, 𝐷𝑖𝑟𝑒𝑐𝑡(𝑃𝐹) 𝐼𝑛𝑑𝑖𝑎 accounts for all the CO2 emissions directly released in India embodied in the global PF of all of the MNEs around the world.…”

Regional trade agreement burdens global carbon emission mitigation

“…Although global flows of foreign direct investment (FDI) shrank in recent years 50,51 and fell sharply by one third 52 in 2020 as a result of the COVID-19 pandemic, FDI among RCEP members will likely continuously increase after the RCEP enters into force. Increasing FDI may facilitate relocating some climate-unfriendly industries or production activities from industrialized RCEP members to developing countries 23,24 . As a result, FDI may magnify the environmental burdens on developing RCEP members.…”

“…The first strand of the literature focuses on quantifying the economic welfare effects of RTAs [12][13][14][15][16][17] and has largely neglected environmental problems. Conversely, the second strand has substantially accounted ex post for the large carbon flows between countries via international trade [18][19][20][21][22][23][24][25][26][27] .…”