Does Global Value Chain Participation Decouple Chinese Development from C[O.sub.2] Emissions? A Structural Decomposition Analysis.

• Author: Wang, Hui

1. INTRODUCTION

   China has been the world's largest C[O.sub.2] emitter since 2006. Mitigating its carbon emissions is central to achieving the climate goal of limiting the global warming well below 2[degrees]C. After a temporary slowdown in growth in 2014-2016, China's C[O.sub.2] emissions reached 9.7 Gigatons in 2016, accounting for 27.2% of global emissions (Boden et al., 2017). In the Nationally Determined Contributions communicated to UNFCCC in 2015, the Chinese government has pledged to peak its emissions before 2030. Over the years many policy measures have been implemented to cut emissions. However, the prospect is not optimistic since emissions resumed increasing in 2017-2018 (Le Quere et al., 2018) due to economic resurgence (Jackson et al., 2018). Decoupling economic activities from C[O.sub.2] emissions is essential to achieving the climate goals of China and the entire world (Deutch, 2017).

   Global value chains (GVCs) have been reshaping the Chinese economy (World Bank et al., 2017). Arising from comparative advantages of economies, different stages of business processes, ranging from R&D to manufacturing and sales, may take place in different regions and are linked via international/interregional trade. Economic activities that cross borders intertwine together to form a complex global network, and value addition occurs along the network. The production of goods and services involving cross-border factor content is referred to as GVCs (Wang et al., 2017d). The Chinese economy has increasingly integrated into GVCs in the past decades. GVC participation has facilitated the economic upgrading and structural transformation of China (UNIDO, 2018). GVC governance has attracted immense attention from Chinese political leaders (Stephenson, 2016; UNIDO, 2015). A recent example of GVC governance regimes of China is the Belt and Road Initiative (BRI) proposed in 2013.

   GVCs reshape economic activities as well as the associated environmental externalities. With the rising GVCs, fostering the environmental sustainability of GVCs becomes crucial (Fessehaie and Morris, 2018). An important aspect of GVC governance is about C[O.sub.2] emissions. As to China, a growing amount of C[O.sub.2] emissions have embodied in cross-border activities, which are affected by the GVC participation pattern and GVC linkages (Guan et al., 2018). As a responsible global citizen, China has actively committed to reducing emissions along GVCs. To address the environmental and climate concerns arising from the development of BRI projects, for example, the Chinese government and United Nations Environment Programme (UNEP) jointly started the Green Belt and Road Strategy in 2018, aiming to steer the development of BRI towards sustainability. Analyzing C[O.sub.2] emissions in the GVC context helps Chinese policymakers to identify strategies to promote economic growth while achieving emission mitigation along GVCs.

   To address the issue, a fundamental question is to assess the role of GVCs in decoupling economic activities and C[O.sub.2] emissions in China. This study adds to the literature by proposing a multi-region structural decomposition analysis (SDA) model to quantify the impacts of GVC determinants on emission intensity and by applying the model to study China's emission intensity changes in 2007-2012. Specifically, we first measure the flows of C[O.sub.2] emissions and economic activities along GVCs in the multi-region input-output (MRIO) framework. We then adopt the SDA technique to quantify the impacts of GVCs on production-based and consumption-based emission intensities, respectively. The GVC linkages are accordingly disentangled from the forward or backward viewpoint. Due to the uneven development of Chinese provinces, vertical specialization within China exists. We conduct the analysis at the provincial level to account for the domestic value chains among Chinese provinces. Our results show that GVCs were more emission intensive than the economic activities in individual Chinese provinces in 2007-2012. GVCs, particularly the domestic component, were the primary source of China's decoupling from emissions during this period, nonetheless the decoupling slowed down after the global financial crisis. The main obstacle to further greening GVCs of China was the global outsourcing structure of intermediate goods.

   The rest of this paper is organized as follows. Section 2 reviews relevant literature. Section 3 describes the methodology. Section 4 introduces the data used. Section 5 presents the results and relevant discussions. Section 6 concludes with policy implications.

2. LITERATURE REVIEW

   In energy and environmental studies, the term decoupling usually refers to "breaking the link between environmental bads and economic goods" (OECD, 2002). A number of indicators have been introduced to measure the decoupling of environmental pressure from economic growth, and the most commonly used ones are the Tapio index (Tapio, 2005) and environmental intensity (OECD, 2002). The intensity indicator, e.g. C[O.sub.2] emissions per unit of GDP, is able to reflect the relative change in environmental impacts with respect to economic growth, and can therefore be viewed as an indication of decoupling. Examples of academic studies and policy analyses adopting intensity indicators to measure decoupling include OECD (2002), European Environment Agency (2007), UNEP (2011), de Freitas and Kaneko (2011), and Moreau and Vuille (2018). Besides, intensity indicators, e.g. energy intensity and C[O.sub.2] emission intensity, have long been used by the Chinese government to monitor its progress towards sustainability. For example, in the 2015 Paris Agreement, China pledged to reduce its C[O.sub.2] emission intensity by 60-65% compared to the 2005 level by 2030. Owing to its simplicity and practical usefulness, this study adopts the intensity indicator to measure the decoupling between C[O.sub.2] emissions and economic growth in China.

   A widely used analytical tool to quantify the effects of trade-related activities on energy and emissions is structural decomposition analysis (Lenzen, 2016). Built upon the input-output table, SDA is able to detail the economic linkages among sectors (Rose and Casler, 1996). As an accounting approach, SDA distributes a change in an indicator to a set of determinants that can explain the change in the indicator from an economic systems viewpoint (Wang et al., 2017a). (1) SDA has been applied to study two general categories of indicators, i.e. quantity indicators (e.g. total C[O.sub.2] emissions) and intensity indicators, and the SDA modelling of the two indicator types are fairly different (Su and Ang, 2015). SDA with quantity indicators has been the norm in the literature (Wang et al., 2017a). See, for example, Xu and Dietzenbacher (2014) and Arto and Dietzenbacher (2014) analyze the impacts of trade patterns on global emissions, Hoekstra et al. (2016) quantify the C[O.sub.2] emission cost of international sourcing, de Vries and Ferrarini (2017) assess the role of technology and consumption in advanced and emerging economies, and Kaltenegger et al. (2017) examine the effect of globalization on energy footprints.

   Examining changes in intensity indicators using SDA has emerged in recent years with the increasing use of intensity indicators in national climate goal setting (Wang et al., 2017b). Since two types of I-O tables exist (i.e. single-region I-O (SRIO) tables and multi-region I-O (MRIO) tables), SDA can be further classified into SR-SDA and MR-SDA. Within the SRIO framework, SR-SDA isolates the impacts of production structure and final demand. For example, Zhang and Lahr (2014) and Zeng et al. (2014) apply SR-SDA to study China's energy intensity changes, Su and Ang (2017) investigate China's C[O.sub.2] emission intensities embodied in various production activities, and Su et al. (2019) identify the critical paths that affect China's emission intensity changes. On the basis of MRIO tables that capture cross-region economic linkages, MR-SDA can further quantify the impacts of international/interregional trade on energy and emission intensities, (2) which is a very recent development. To our knowledge, only Wang et al. (2017b) develop a MR-SDA model to examine emission intensity changes of global economies.

   Despite the expansion of the SDA literature, some research gaps can be identified. First, existing SDA models fail to quantify the GVC impacts on an intensity indicator. The preceding shows that the present MR-SDA approach usually accounts for economic activities and associated energy/emissions from a trade viewpoint and does not look into the production processes. Thus, value addition activities along GVCs and non-GVC activities cannot be distinguished. This methodological difficulty obstructs further scrutiny of GVC impacts on energy/emissions. Second, no study examining China's C[O.sub.2] emission intensity in the GVC context has been reported. Existing empirical studies often focus on energy/emissions embodied in gross trade, including both the final goods and intermediates. This masks the role of GVCs in energy and emission issues. Besides, previous studies investigating the impacts of global trade on China's energy/emissions are often conducted at the country level, which ignores the regional heterogeneity of Chinese provinces in terms of GVC participation. Third, existing studies on decoupling largely ignore the role of consumption. The commonly used measures of economic output and related energy/emissions, e.g. GDP and national total emissions, take a production perspective and only account for the activities occurred in the territory of an economy. On the other hand, the emissions induced by the domestic consumption of an economy, regardless of where it takes place, i.e. the consumption-based emissions, has become increasingly relevant in policymaking by reflecting the role of consumption (Deloitte...