Trade Openness and Carbon Leakage: Empirical Evidence from China’s Industrial Sector

Abstract

China is a large import and export economy in global terms, and the carbon dioxide emissions and carbon leakage arising from trade have great significance for China’s foreign trade and its economy. On the basis of trade data for China’s 20 industrial sectors, we first built a panel data model to test the effect of trade on carbon dioxide emissions and the presence of carbon leakage for all industrial sectors. Second, we derived a single-region input–output model for open economies based on the industrial sectors’ diversity and carbon dioxide emissions, and performed an empirical test. We estimated the net carbon intensity embodied in export, which is 0.237tCO2/ten thousand RMB, to divide all sectors (ACSs) into high-carbon sectors (HCSs) and low-carbon sectors (LCSs). The results show that higher trade openness leads to a reduction in the intensity of CO2 emissions and gross emissions and that there are obvious structural differences in different sectors with different carbon emission intensity. The coefficient of trade openness for LCSs is −0.073 and is statistically significant at the 1% level, so higher trade openness for LCSs leads to a reduction in the CO2 emissions intensity. However, the coefficient for HCSs is 0.117 and is statistically significant at the 10% level, indicating that higher trade openness increases the CO2 emissions’ intensity for HCSs. The difference is that higher trade openness in LCSs can help reduce the CO2 emissions’ intensity without the problem of carbon leakage and with the existence of the environmental Kuznets curve (EKC), whereas there is no EKC for HCSs and carbon leakage may happen. We introduced dummy variables and found that a “pollution haven” effect exists in HCSs. The test results in HCSs and LCSs are exactly the opposite of each other, which shows that the carbon leakage of ACSs cannot be determined. The message that can be drawn for policy makers is that China does not need to worry about the adverse impact on the environment of trade opening up and should, in fact, increase the opening up of trade, while becoming acclimatized to environmental regulation of a new trade mode and new standards. This will help amplify the favorable impact of trade opening up on the environment and improve China’s international reputation. The policies related to trade should encourage structural adjustment between the sectors via the formulation of differential policies and impose a restraint on sectors that have high levels of CO2 emissions embodied in export.

Trade Impacts on Embodied Carbon Emissions—Evidence from the Bilateral Trade between China and Germany

“…The theories of “Pollution Haven Hypothesis” [ 5 ] and “Race to the Bottom Hypothesis” [ 17 ] revealed that expanding trade could result in a polluted environment, and the above theories were also proved in empirical studies (see for example, Ederington and Minier [ 18 ]; Dean et al [ 19 ]). Meanwhile, the issues of carbon leakage and CO 2 transfer happen among trading partners; for instance, relocating productions to countries with less stricter emission reduction standards [ 5 , 20 ] and transferring carbon emissions from developed countries to developing ones [ 21 ]. The above theories and phenomena described the adverse effects of international trade on the environment.…”

Analysis of Regional Differences and Influencing Factors on China’s Carbon Emission Efficiency in 2005–2015

“…The absorption of foreign capitals is an essential factor in the economic development and technological progression of developing countries. Currently, a considerable amount of research has been published on this topic [74][75][76][77][78]. On the one hand, the foreign capital may accompany a transfer of pollution-intensive industries from developed countries to developing countries less stringent environmental regulations, which gives rise to the problem of carbon leakage (the Pollution Haven Hypothesis) [79].…”

“…The proportion of the local foreign direct investment to GDP (%) Unknown [74][75][76][77][78][79][80] Energy intensity (EI)…”

Future Options for Industrial Free Allocation in the NZ ETS

“…However, the empirical data used covered the early years of the EU ETS, when free allocation was at 100 per cent for entities. Recent studies in China show the absence of evidence of carbon leakage risk from pilot systems; however, these have typically used extensive free allocation (Fan et al 2019). International literature reviews of ex post analysis to date suggest that existing emissions pricing models have reduced the level of emissions without impacting the economic performance of business (Ministry for the Environment 2018; High-Level Commission on Carbon Pricing and Competitiveness 2019; Acworth et al 2020;Verde et al 2020).…”