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Accounting for the carbon footprints and embodied primary resources using multi-region input-output analysis

In Report of PSEE Resource Study 2013-03

From 1971 to 2010, world trade grew fast by 10% per year on average (World Trade Organization 2011). The rapid growth of international trade contributes not only national economic growth but also increasing environmental pressures, such as raw material extraction and depletion, carbon emissions, water resource deterioration and landscape change and soil degradation. Most of these environmental pressures do not constitute as part of the traded products and remain as hidden burdens to the producing countries. These are usually called as upstream burdens.

The main purpose of this paper is to address the cross-border upstream burdens in the supply chain of iron and steel products focusing on raw materials extraction, steel scraps recycling and carbon emissions. Materials and primary resources used in the upstream productions of traded products are called materials embodied in trade and carbon emissions generated from the upstream productions are called emissions embodied in trade. Accounting for indirect materials and emissions embodied in trade is important to national decision makers who concern about the life-cycle impacts of domestic production and consumption.

First, when domestic policies aim solely at the improvement in domestic resource efficiency, the global impacts, such as climate change and resource depletion due to the outsourcing of raw materials and components to other countries, cannot be addressed properly. Japan can be considered as one of the most efficient countries in resource and energy use in the world. However, taking indirect material use and emissions into account, Japan’s efficiency profiles can be different. For example, from 1980 until 2005, Japan had continuously the highest net amount of materials embodied in imports, most of which were from developing countries which had much lower resource efficiencies (Dittrich, 2010). To understand the material flows and emission sources along the supply chain is therefore important to policies addressing not only the nation-wide material use efficiency and emissions but also global resource efficiency and emissions.

Second, due to the existence of the hidden upstream burdens, the true costs of production are not fully reflected in the transaction costs. This is so-called environmental burden shifting via trade. A worse case is that environmental burdens will continuously shift from developed countries to developing countries and the latter ones lack both technologies and financial capacity to prevent and remedy the ecological damages. Analysis of the material flows and emission sources along the global supply chain is therefore necessary to help assess trade patterns in terms of ecological impacts.

This study focuses on iron metal because it is one of the fundamental materials supporting modern economic growth. Iron and steel production is one of most energy-intensive sectors and dependent on iron metal which is a non-renewable resource. As both an importing and exporting country, Japan plays an important role in global iron and steel production and consumption. Report from the World Steel Recycling (2011) shows that there has been significantly increasing of scraps used in steelmaking process, which can help reduce both virgin material use and carbon emissions. Focusing on both the virgin iron metal and steel scraps used in Japan’s iron and steel making, this study includes international trade among ten regions, which include two major iron ore producing countries (Australia, Brazil), six steel producing countries (China, India, Japan, Korea, the EU and the US) and two major oil and gas producing country groups.

We constructed a global multi-region input-output (MRIO) model based on the GTAP 7 database. To capture the virgin vs. secondary material use, we singled out iron ore mining sector, steel scraps, pig iron, steel making using iron ores (blast furnace) and the technology mainly using steel scraps (electric arc furnace). We calculated materials and emissions embodied in the downstream uses of iron and steel products and compared the total resource efficiency and emissions embodied in the final consumption across countries. The international trade patterns of iron ores, steel scraps and iron and steel products are assessed in terms of capital flows, material flows and carbon emissions. Policy implications are derived to address (i) the hidden flows of trade; (ii) total resource efficiency and emissions taking account of resource endowment and comparative competitiveness of countries; and (iii) how Japan can contribute to increase global resource efficiency and reduce global emissions.