Research Articles International Carbon Trade and Domestic Climate Politics • Kathryn Harrison*

Abstract This article theorizes about the implications for domestic climate politics of three distinct roles countries play in the global carbon supply chain: fossil fuel producer, manufacturer of carbon-intensive goods, and final consumer. Because international responsibility is assigned to territorial emissions, countries at either end of the global supply chain effectively evade environmental responsibility by shifting fossil fuel combustion to manufacturing countries. In so doing, they lessen the political challenges of reducing domestic emissions. Although exporters of carbon-intensive goods are reluctant to disadvantage local producers, importers can craft policies that both reduce territorial emissions and create local jobs. Ironically, fossil fuel exporters can emerge as leaders in reducing their own territorial emissions, a finding illustrated by case studies of British Columbia and Norway. The conclusion argues that shifting responsibility for carbon emissions to the point of either final consumption or fossil fuel extraction could facilitate an international climate agreement.

Climate leadership has emerged at times from surprising quarters. Since 1991, Norway, a major oil producer and exporter, has had one of the world’s highest carbon taxes. Norway also has committed to achieving carbon neutrality by 2050. In 2008 the Canadian province of British Columbia, which relies on coal exports from local mines, adopted a carbon tax that both the OECD and World Bank have advanced as an international model. The explanation for these seem- ing contradictions lies at the intersection of international trade, domestic politics, and global environmental governance. The United Nations Framework Convention on Climate Change (UNFCCC), via the Intergovernmental Panel on Climate Change (IPCC), assigns responsibility to countries only for the greenhouse gas emissions that occur within their borders.1 Jurisdictions that

* I gratefully acknowledge ﬁnancial support from the Social Sciences and Humanities Research Council of Canada via the Sustainable Prosperity Research Network, superb research assistance from Stefan Pauer, and insightful feedback from Endre Tvinnereim, Brent Sutton, and the journal’s anonymous reviewers. 1. UNFCCC 2006, para.9; IPCC 2006, 1.4.

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export fossil fuels thus can prosper while evading responsibility for the downstream emissions that inevitably will result. While that is true for all fossil fuel exporters, the political implications are most apparent in the case of exporters that do not rely heavily on their own fuels. With relatively low-carbon economies powered by hydro-electricity, both Norway and British Columbia can tax domestic carbon emissions with minimal consequences for local industry, including their export-oriented fossil fuel producers. Moreover, both governments have been able to embrace domestic mitigation measures because they have confidence in the security of jobs in and tax revenues from the fossil fuel industry. Indeed, in both jurisdictions, policies to reduce territorial emissions have been celebrated with almost no acknowledgment of the much greater global damage being done by their growing fossil fuel exports. Motivated by these cases, this article theorizes about the implications of international trade for domestic climate politics more broadly, analyzing three distinct roles countries play in the global carbon supply chain—fossil fuel exporter, manufacturer of goods for export, and importer of goods. At both ends of the international supply chain, fossil fuel exporters and importers of “embodied carbon” effectively evade environmental responsibility by shifting fossil fuel combustion to manufacturing countries in the middle of the supply chain. While economists and physical scientists have documented these carbon flows, this article is among the first to explore the domestic political implications of these trading patterns. I argue that in evading environmental responsibility for fossil fuel combustion, importers of embodied carbon and exporters of fossil fuels lessen the political challenges of reducing their own territorial emissions. The article focuses most closely on the understudied implications of fossil fuel exports. Countries endowed with abundant fossil fuels often take advantage of those resources by burning them at home, with the result that exports of fossil fuels and embodied carbon go hand in hand. However, that is not always the case. Some fossil fuel exporters have relatively clean manufacturing economies, while relying on imported embodied carbon. Still other countries with carbon- intensive manufacturing rely on imported fossil fuels. In other words, trade in fossil fuels and trade in embodied carbon are distinct activities, which turn out to have different domestic politics. In particular, while exporting embodied carbon deters domestic mitigation, exporting fossil fuels need not do so and indeed may facilitate adoption of policies to abate territorial emissions by providing durable economic benefits. In focusing on territorial emissions, which entail the most concentrated and localized costs of mitigation, the international community has assigned responsibility at the point in the global carbon supply chain that presents the greatest challenge for domestic politics. Although the primary focus of the article is the implications of international carbon trade for domestic politics, the conclusion reflects on whether reassignment of responsibility to either the point of fossil fuel extraction or final consumption could yield more favorable international politics.

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The Global Carbon Supply Chain

As Peters and Hertwich observe, “international trade causes a geographic separation of consumers and the pollution emitted in the production of consumable items. This gives a mechanism for consumers to shift environmental pollution associated with their consumption to distant lands.”2 Analysis of ecological and, more recently, carbon footprints has highlighted the global environmental consequences of consumption.3 While ecological footprint analysis originally fo- cused on the individual consumer, subsequent literature has examined national-level implications.4 Dauvergne coined the term “ecological shadow” to describe how a nation’s imports impose ecological costs in other, often developing, countries.5 Multi-region input–output analysis allows for tracking of raw materials, intermediates, and ﬁnal goods as they cross borders, thus allow- ing for comparison of different measures of environmental impact. Before reviewing insights from that literature, several deﬁnitions are in order. Territorial or production emissions are those that countries release within their own borders. Production emissions correspond to national greenhouse gas emissions inventories reported to the United Nations under the Framework Convention on Climate Change. Embodied carbon refers to emissions that occur at any point or location in the production of a good or service. At the national level, consumption emissions refers to all embodied carbon associated with goods and services consumed in a given country. Consumption emissions differ from production emissions to the extent that goods are imported, exported, or produced at home as follows:

Ec =Ep + EEI − EEE

Ec = Consumption Emissions

Ep = Production Emissions EEI = Emissions Embodied in Imports EEE = Emissions Embodied in Exports The balance of emissions embodied in trade (BEET) follows: BEET = EEE − EEI Countries with a positive balance of emissions in trade are net exporters of embodied carbon, while those with a negative BEET are net importers. While there is a rapidly growing body of literature comparing production and consumption emissions,6 scholars have only recently turned their attention

2. Peters and Hertwich 2008. 3. Wackernagel and Rees, 1998. 4. Turner 2014. 5. Dauvergne 1997; Dauvergne 2008. 6. Peters and Hertwich 2008; Pan et al. 2008; Weber and Peters 2009; Davis and Caldeira 2010; Peters et al. 2011, Steinberger et al. 2012; Harris and Symons 2013; Turner 2014.

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to the prior step in the carbon supply chain, trade in fossil fuels themselves.7 Extension of prior terminology can be a source of confusion, however. Although fossil fuels embody carbon, embodied emissions refers to those that have already occurred in the manufacture of a product, rather than prospective emissions, which will occur only when a fossil fuel is burned. Also confusing, Davis, Peters, and Caldeira employ the term “extraction emissions” to refer to emissions that will be released downstream when fossil fuels are burned, rather than to emissions released during extraction operations.8 (The latter contribute to territorial emissions in the producing country and embodied emissions in a country importing fossil fuels.) To avoid confusion, the discussion here employs the term extracted emissions to refer to downstream emissions that will occur when fossil fuels are burned. For consistency, extracted, production/territorial, and consumption emissions all are reported as CO2.

Production vs. Consumption Emissions Comparison of production and consumption emissions has yielded several important findings. First, roughly one quarter of the carbon released globally each year is associated with production of goods and services that are internationally traded.9 Tracking those flows is obviously critical if we are to control global emissions. Second, developed countries typically are net importers of embodied carbon, while developing countries typically have territorial emissions higher than their consumption emissions. In 2008 developed countries (as defined by Kyoto Protocol Annex B) had an average BEET of −10% relative to consumption emissions, while developing countries had an average BEET of +11 percent. Davis and Caldeira reflect, “In terms of global equity, the prosperity of developed countries was not only founded on two centuries of fossil fuel emissions, but also in some cases is now being maintained by emissions produced in developing countries.”10 Many Western European countries, including Switzerland, Sweden, France, and the UK, import 25 percent or more of their consumption emissions, with per capita consumption emissions up to 10 tCO2eq/yr higher than territorial emissions.11 Comparison of consumption emissions signifi- cantly reduces the gap in per capita territorial emissions among developed countries. Among developing countries, the largest absolute exporters of embodied carbon emissions are China and India. As the “factory to the world,” up to 30 percent of China’s territorial emissions are associated with production of goods for export.12

7. Davis et al. 2011; updated by Peters et al. 2012. 8. Davis et al. 2011. 9. Peters et al. 2012; Peters and Hertwich 2008. 10. Davis and Caldeira 2010. 11. Davis and Caldeira 2010. 12. Pan et al. 2008.

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Third, there are important differences among developing and developed countries. Although most developed countries are net importers of embodied carbon, 9 of 35 Kyoto Protocol Annex B members are net exporters, including Australia, Poland, and Russia.13 There is also variation among developing countries. Countries at a higher stage of development are burning fossil fuels to serve both their own and others’ consumption, but the poorest of the poor tend to be net importers of embodied carbon.14 Fourth, trends in emissions are not always what they seem. Developed countries’ reliance on imported carbon from the developing world has been growing over time, more than compensating for reductions in territorial emissions. Their territorial emissions decreased by 2 percent from 1990 to 2008, but their consumption emissions or carbon footprint actually increased by 7 percent.15 Finally, the fastest-growing share of carbon embodied in developed country imports is not from emissions-intensive industries, but rather non-intensive sectors, such as textiles and electronics. This suggests that the observed trends are less the result of migration of dirty industries in response to divergent environmental standards than of trends in global supply and demand unrelated to carbon pricing.16

Extracted Carbon vs. Production Emissions Extension of analysis back to the beginning of the carbon supply chain yields further insight. As Davis, Peters, and Caldeira note, “[F]ossil fuel resources are more geographically concentrated than energy demand, and therefore, fuels burned to generate energy have, in many cases, been extracted far from the point 17 of combustion and resulting CO2 emissions.” As a result, 37 percent of future emissions are traded in the form of fossil fuels, compared to 22 percent as embodied carbon.18 While oil historically has dominated the fossil fuel trade, international trade in coal and natural gas is growing. Table 1 reports countries’ fossil fuel production (extracted carbon), fossil fuel use (production emissions), and consumption of carbon-intensive goods (consumption emissions), as well as the net trade in fossil fuels and embodied carbon that occurs between these steps. The column “Extracted Carbon Imports as Share of Territorial Emissions” is the ratio of extracted carbon CO2 in fossil fuel imports to CO2 from fossil fuel-related territorial emissions. The value is positive if a country is a net importer of fossil fuels, with values ranging from 0 to 100 percent. Negative values indicate net exports of fossil fuels, but these can take on values in excess of 100 percent since a country can export more

13. Peters and Hertwich 2008a. 14. Steinberger et al. 2012. 15. Caldeira and Davis 2011. See also Peters et al. 2011; Aichele and Felbermayr 2012. 16. Peters et al. 2011; Weber and Peters 2009. 17. Davis et al. 2011. 18. Peters et al. 2012.

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Table 1 Trade in Embodied and Extracted Carbon (2004)

Net Trade Extracted Carbon Embodied Carbon Territorial in Extracted Imports as Share Consumption Net Trade of Imports as Share Trade in Emissions Carbon of Territorial Emissions Embodied Carbon of Consumption Trade in Embodied (MtCO2eq/yr) (MtCO2eq/yr) Emissions (%) (MtCO2eq/yr) (MtCO2eq/yr) Emissions (%) Fossil Fuels* Carbon* Russia 1612 −1428 −89% 1291 −321 −25% E E Australia 377 −497 −132% 361 −17 −5% E B Canada 618 −257 −42% 577 −41 −7% E B Norway 61 −626 −1031% 69 8 12% E I China 4651 181 4% 3704 −947 −26% B E Poland 295 25 8% 272 −23 −9% B B UK 650 44 7% 883 233 26% B I India 1112 286 26% 1044 −69 −7% I B USA 6342 1881 30% 6980 638 9% I B Japan 1254 1240 99% 1536 282 18% I I France 413 404 98% 586 174 30% I I Germany 910 623 68% 1134 224 20% I I Ireland 47 42 90% 61 14 23% I I Spain 355 328 92% 416 61 15% I I Sweden 56 55 97% 92 36 39% I I EU27 4588 2813 61% 5480 891 16% I I

*E = net exporter, I = net importer, B = balanced trade Source: The analysis is derived from the supporting data for Davis et al. (2011), available at http://www.pnas.org/content/suppl/2011/10/14/1107409108. DCSupplemental. Kathryn Harrison • 33

Table 2 Patterns in Trade of Fossil Fuels and Embodied Carbon Importer of Exporter of Embodied Carbon Balanced Trade Embodied Carbon

Importer of Fossil Fuels EU India (2004) China (2015?) Japan USA India (2015?) Balanced Trade UK Poland China (2004) Exporter of Fossil Fuels Norway Canada Russia BC Australia

fossil fuels than it uses domestically. At the limit, Norway exports more than ten times as much carbon in fossil fuels as it emits domestically. The column “Embodied Carbon Imports as Share of Consumption Emissions” presents a similar calculation for the production-to-consumption step in the supply chain. A positive value indicates that a country is a net importer of embodied emissions, while a negative value indicates a net exporter. The countries in Table 1 were selected to illustrate the diversity among developing and developed countries, fossil fuel exporters and importers, and embodied carbon exporters and importers. The ﬁnal two columns of Table 1 order countries based on the direction and extent of trade in extracted and embodied carbon. Countries are designated as net importers or exporters if greater than 10 percent of their needs are met through trade, and balanced otherwise. Divergence along these two dimensions is illustrated by Table 2. Among fossil fuel exporters, some, like Russia, also export embodied carbon; some, like Australia and Canada, have fairly balanced trade in embodied carbon; and some, like Norway, are net importers of embodied carbon. Among importers of fossil fuels in 2004, India and the US had reasonably balanced trade in embodied carbon, while Western European countries and Japan also rely on imports of carbon-intensive consumer goods. While no countries had both signiﬁcant fossil fuel imports and net exports of embodied carbon in 2004, with growing fossil fuels imports it is likely that China and India have since moved into that category.19 Although it often has been assumed that fossil fuel exporters also have fossil-fuel-intensive manufacturing economies,20 Figure 1 reveals that this is not the case. A plot of extracted carbon exports relative to GDP vs. territorial emissions/GDP reveals that many countries do cluster along the expected up- ward slope, but also that many others are nowhere close to that line. The im- plication is that trade in fossil fuels and trade in carbon-intensive goods are distinct economic activities, which may also yield distinct politics.

19. Andrew et al. 2013. 20. World Bank 2007; Ward and Cao 2012.

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Figure 1 Carbon Imports versus Territorial Emissions, 2004

Sources: Extracted carbon trade and territorial emissions from Davis et al. 2011; GDP from IMF World Economic Outlook (current prices). Davis et al. report data for 93 individual countries plus 19 regions. Only the former are included here.

Implications of Carbon Trade for Domestic Politics

In responding to climate change, politicians seek to maximize political credit and minimize blame. While political costs and benefits are a function of economic costs and environmental benefits, they are unlikely to be directly proportional for three reasons. First, voters and thus their elected representatives care disproportionately about costs incurred and benefits delivered within their borders. Second, citizens tend to be preoccupied with the near term. In response, politicians seeking their votes will be particularly attentive to costs incurred and benefits received before the next election. Third, the particular distribution of costs and benefits can transform local politics. Costs and benefits that are widely diffused, affecting a large number of voters by only a small amount, typically will elicit less political engagement than those that affect a smaller number of people to a larger degree.21 Politics is not only about who wins and loses, but who is paying attention. All else being equal, one would expect both costs and benefits to be more politically salient to the extent they are local, immediate, and concentrated. Mitigation of territorial greenhouse gas emissions presents a clear challenge on each of these dimensions. Environmental benefits are primarily en- joyed by other countries and future generations. Political credit thus is easily outweighed by blame for near-term, local, and concentrated economic impacts. 21. Olson 1965.

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Political incentives may be stronger, however, to the extent that there are local environmental co-benefits, such as reduction of particulates in the air from fossil fuel combustion or reduced risk of oil spills. Similarly, creation of local clean energy jobs may help to counteract impacts on fossil fuel-dependent industries, though hypothetical job gains are unlikely to be weighed as heavily as the loss of existing jobs with identifiable incumbents. The politics of self-interest described above may be overcome through normative commitments by either political leaders or voters themselves.22 There is evidence that citizens are more willing to pay for diffuse environmental benefits as their incomes increase. An Environmental Kuznets Curve is produced when the “scale effect” of increasing pollution as an economy grows is counteracted by the “technique effect” as citizens demand a cleaner environment with increasing incomes.23 There is, however, considerable skepticism as to the exis- tence of an environmental Kuznets curve for territorial carbon emissions, since carbon dioxide does not affect local air quality,24 and no evidence exists of an environmental Kuznets curve in consumption emissions.25 If all goods consumed within a country are also produced in that country, the politics of consumption and production are identical. Similarly, if all fossil fuels consumed within a country are produced within that country, the politics of fossil fuel production and consumption are identical. Although diffusely affected consumers are unlikely to notice and oppose small price increases as a result of emissions abatement, their battles can be expected to be fought by local producers and workers, who bear more concentrated costs.

The Politics of Embodied Carbon Exports Abatement of territorial greenhouse gas emissions is clearly an uphill political battle. What marginal impact can be expected if the polluting activities in question produce goods that are traded internationally? Economic theory anticipates that unilateral policies to regulate or price greenhouse gas emissions will reduce demand for fossil fuels, decrease the competitiveness of exports, and increase the competiveness of imports from trade-exposed sectors.26 The higher the carbon price and the more carbon-intensive a country’s economy, the greater the impacts on competitiveness. Moreover, such impacts may prompt migration of energy-intensive, trade-exposed ﬁrms to jurisdictions with more lax regulatory standards. This phenomenon, known as leakage, would not only exacerbate costs to the local economy but also undermine environmental beneﬁts. Exports of embodied carbon thus tends to exacerbate opposition from carbon-intensive industries to the control of territorial emissions.

22. Harrison and Sundstrom 2010. 23. Antweiler et al. 2001. 24. WTO 2009. 25. Steinberger et al. 2012. 26. World Bank 2007; WTO 2009.

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All else being equal, one would expect countries to be less inclined to adopt measures to regulate their own production emissions the more carbon- intensive and trade-exposed their economies. Consistent with these expectations, comparative studies at both the national and subnational level have found that jurisdictions with more greenhouse gas-intensive economies have adopted less aggressive climate change mitigation policies.27 However, analyses of the global carbon supply chain summarized above reveal characteristic roles of different countries with respect to trade in embodied carbon. Net exporters of embodied carbon tend to have more carbon-intensive economies, while net importers have less carbon-intensive economies. While exporters of carbon-intensive goods can be expected to face particularly strong opposition to carbon pricing or regulation, the next section considers how the politics of emissions abatement can differ if a country is a net importer of carbon-intensive goods.

The Politics of Embodied Carbon Imports Beyond local jobs and co-beneﬁts, imports of embodied carbon can lower the political obstacles to regulation of territorial emissions in two other ways. Of particular interest is a distinction between process standards, which apply only to polluting activities within a jurisdiction, and product standards, which apply to all goods sold within the jurisdiction, regardless of origin. Product standards can be particularly appealing to importing jurisdictions for several reasons. In the case of products that yield emissions during use, such as household appliances, motor vehicles and fossil fuels themselves, product regulations like tailpipe and energy efﬁciency standards have the effect of exporting a greater fraction of concentrated compliance costs the greater a country’s reliance on imported products.28 Simply put, it is easier to set demanding performance standards for goods produced somewhere else, since the most concentrated costs, in particular any job losses at the point of manufacture, will occur in another jurisdiction. Process and production method (PPM) standards are a special category of product standards that regulate the sale of products based on emissions released during production. PPM standards can provide a politically attractive means for an importer of embodied carbon to substitute locally produced goods for carbon-intensive imports. For instance, clean electricity standards adopted by US state governments appear to have been motivated, at least in part, by a desire to substitute locally produced renewable energy for imported fossil fuel-derived electricity.29 Similarly, for countries lacking their own fossil fuels, low carbon fuel standards may facilitate a shift from imported gasoline toward locally produced biofuels.

27. Compston and Bailey 2008; Harrison 2013a; Lutsey and Sperling 2008; Matisoff 2008; Rabe 2007; Thomson and Arroyo 2011. 28. Harrison 2013a. 29. Lyon and Yin 2010.

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When policymakers do rely on process standards to reduce territorial emissions, we anticipate a shift toward consumption-based pricing. In particular, local producers concerned for their competitiveness can be expected to lobby for border taxes on imported goods to “level the playing ﬁeld.” The less carbon- intensive the local industry, the stronger the rationale to seek border tax adjustments. Border measures can also offer advantages to politicians by reas- suring polluting industries, which are paying attention, without generating sig- niﬁcant voter opposition, since consumers are unlikely to notice minor price increases in the absence of local industry opposition. It is noteworthy that in extending the domestic carbon price to a country’s imports and rebating taxes on exports, border tax adjustments have the effect of shifting responsibility from territorial to consumption emissions. In other words, assignment of responsibility for territorial emissions can create political pressure for consumption-based policies, though only when a country has committed to regulation of its own emissions. Import taxes adopted by destination states also have the potential for contagion by providing incentives for exporting countries to adopt their own carbon prices to retain border tax revenues.30 Sim- ilarly, Vogel has documented that product standards, particularly when adopted by large markets, can prompt a “Baptist–bootlegger” alliance between environ- mentalists and clean producers lobbying for stronger standards in the country of origin.31 The forgoing suggests that regulation or pricing at the point of consumption can offer more favorable domestic politics than abatement of territorial emissions. This conclusion differs from Harris and Symon’s argument that the current territorial approach “suits the short term interests” of wealthy countries because “it avoids targeting consumption.”32 However, once a policymaker has accepted a goal to control territorial emissions, it is not clear why he or she would be concerned about limiting consumption of imported goods relative to those produced domestically, which would be the practical difference between a territorial- and consumption-based approach. It is, however, clear that net exporters of embodied carbon have reasons to resist consumption-based pricing in destination countries. As Pan, Phillips, and Chen observe, countries such as China have been “willing partners” in the growing disparity in balance of trade in embodied carbon between developed and developing countries.33 Consistent with the political advantages of a consumption-based approach, subnational climate policy leaders have relied disproportionately on product, rather than process, standards.34 The question remains why national governments have been slow to adopt either product standards or border tax adjustments. It may be simply that beyond the already coordinated efforts of

30. Harris and Symons 2013. 31. Vogel 1995. 32. Harris and Symons 2013, 11. 33. Pan et al. 2008. 34. Harrison 2013a.

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EU member states, there are relatively few examples of meaningful carbon pricing or domestic regulation that demand a border defense. Alternatively, fearful that such measures will run afoul of international trade law, nations may be waiting for ﬁrst movers to test the legal waters, as US states have done with respect to California’s low carbon fuel standard. However, a growing body of legal scholarship arguing that well-designed product standards or border measures can survive a WTO challenge suggests that a shift toward consumption-based approaches by developed countries may be a matter of time.35

The Politics of Fossil Fuel Exports Economists and political scientists have paid little attention to the politics of production and export of fossil fuels as distinct from production and export of carbon-intensive manufactured goods.36 Two features of fossil fuels are worth noting at the outset. First, and rather obviously, is their unavoidable contribution to climate change.37 Used as intended, fossil fuels produce carbon dioxide. Negotiation of an international climate treaty is thus contrary to the interests of fossil fuel exporting countries. However, a second factor mitigates the implications for domestic climate politics: fossil fuels typically release an order of magnitude more carbon at the point of use than at the point of extraction. This creates the potential for a significant disparity between the economic and environmental interests of the country that produces fossil fuels and the country that burns them. The magnitude of that disparity will depend, however, on the carbon intensity of extraction. Although variation in the carbon intensity of fossil fuels at the point of combustion is common knowledge, there is also significant variation in the emissions intensity of extraction and thus in the share of life-cycle emissions from a fossil fuel that occur in the country of origin. Carbon emissions per barrel of oil extracted can vary by a factor of twelve from freely flowing oil to more energy-intensive extraction of tar sands or shale oil, ranging from 5 to 33 percent of life cycle emissions.38 Similarly, the carbon intensity of natural gas production can vary greatly depending on leakage rates, flaring practices, and reliance on production methods such as fracking. US EPA emissions factors assume 16 percent of life-cycle emissions for natural gas are released during production, but bottom-up analyses suggest that can vary by a factor of two or more, with a further doubling if the gas is liquefied for export.39 Ironically, the most emissions-intensive of fossil fuels, coal, typically has the lowest

35. Charnovitz 2002; Epps and Green 2010; Low et al. 2012; Pauwelyn 2013. 36. For instance, Ward and Cao (2012) use energy production/GDP as a proxy for both energy production and consumption. 37. Newell and Paterson 1998. 38. Gordon et al. 2015. The life-cycle range is less than a factor of twelve because different sources also yield varying downstream emissions. 39. US Department of Energy 2014.

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production-related emissions, i.e., accounting for only about 5 percent of life-cycle emissions. However, extraction emissions can be twice as high when methane is present in the coal seam.40 Extraction-related emissions are a variant of production emissions, with similar expectations of stronger political opposition the more emissions-intensive the industry. A country endowed with fossil fuels that require emissions-intensive extraction will have disincentives to abate its territorial emissions for the reasons discussed above. However, in the case of low carbon-intensity extraction, a fossil fuel-exporting country need not fear significant job losses in its extractive sector as a result of efforts to abate its own territorial emissions. In effect, it can con- tinue to gain significant economic benefits while evading responsibility for in- evitable global emissions. In sum, the greater a jurisdiction’s reliance on imports of embodied carbon, the more likely it is to take action to mitigate its territorial emissions, particularly via product or PPM standards. With respect to fossil fuel exports, the less carbon-intensive the extraction process, and the greater the share of production that is exported, the weaker the expected opposition to territorial emissions abatement by fossil fuel producers. Moreover, one would expect little, if any, attention to downstream combustion emissions. The case studies that follow briefly examine the role of fossil fuel exports in the domestic climate politics of two jurisdictions, British Columbia and Norway. These cases were selected because they presented a puzzle: both have been celebrated as climate leaders yet both are also significant fossil fuel producers. The cases served to guide hy- pothesis generation, and as such are not offered as a systematic test of the forgoing hypotheses, which remains work for future analysts.

British Columbia

Few, if any, would to suggest that Canada is a climate leader. It is the only country to have withdrawn from the Kyoto Protocol, which it did after steady growth yielded average emissions 19 percent above 1990 levels in the Kyoto commitment period.41 However, Canada has a decentralized federal system that grants signiﬁcant authority and, in the absence of federal leadership, autonomy to individual provinces. Canadian provinces thus are akin to ten small countries, with highly diverse resource endowments. One of those provinces, British Columbia (BC), has been celebrated internationally for its revenue-neutral carbon tax. The tax took effect in 2008 at $10 per tonne of carbon dioxide equivalents (CO2eq) with a schedule for annual increases to $30 per tonne of CO2eq in 2012. Tax revenues are fully recycled through a mix of corporate and individual income tax cuts. BC’s tax, like other carbon taxes globally, applies only to combustion emissions, thus exempting

40. US Department of Energy 2014. 41. Environment Canada 2014.

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fugitive emissions from the province’s growing natural gas sector. (See Houle, Lachapelle, and Purdon, this issue.) However, in other respects, the BC tax stands apart from other carbon taxes internationally in the absence of exemptions for particular regions, fuels, or sectors, prompting the Secretary General of the OECD to declare that “British Columbia’s carbon tax is as near as we have to a textbook case, with wide coverage across sectors and a steady increase in the rate.”42 The World Bank proﬁled only the BC tax in releasing a major statement on carbon pricing in June 2014.43 Yet at the same time, the BC economy relies heavily on coal mining, and coal vies with forest products as BC’s top export. How can these two facts be reconciled? The argument here is not that BC’s coal exports are the only or even a primary reason for adoption of the carbon tax. Rather, a conﬂuence of factors cre- ated an exceptional opportunity to overcome the considerable political obstacles to carbon taxation.44 With a temperate climate and mountainous ter- rain, BC not only relies almost entirely on hydro-electricity but also has un- tapped hydroelectric capacity that can further substitute for fossil fuels. A surge in public attention to the environment in 2007 prompted the provincial government to adopt an ambitious target to reduce emissions by one third by 2020 relative to 2007 levels. Consistent with expectations, as a net importer of roughly one-quarter of its consumption emissions,45 the provincial government committed to a variety of product standards—a 100 percent renewable electricity standard, a low carbon fuel standard, and California tailpipe standards for motor vehicles—but it did not opt initially for more politically challenging process standards or taxes. Two additional factors explain why BC took the next step and adopted a carbon tax in 2008. The center-right party in government was able to win the support of its allies in the business community by agreeing to a revenue-neutral and broad-based tax. Finally, the Canadian premier had a strong normative commitment to address climate change, and was able to dis- cipline a reluctant parliamentary majority. Although BC’s did not adopt a carbon tax primarily because of its coal industry, it is nonetheless striking that economic reliance on the most emissions- intensive of fossil fuels offered no hindrance to the tax. With extraction emissions comprising just 1 percent of the provincial inventory and export of virtually all of its production, the BC coal industry was minimally affected by the carbon tax. In fact, the BC Business Council, whose membership includes some of Canada’s largest coal mining companies, was cautiously supportive of the tax when it was announced in 2008.46 Moreover, the prosperity of the BC coal industry provided indirect support for policymakers. With a dozen

42. http://www.oecd.org/about/secretary-general/The-climate-challenge-achieving-zero- emissions.htm 43. http://www.worldbank.org/en/programs/pricing-carbon#1 44. Harrison 2013b. 45. Dolter and Victor 2014. 46. Jock Finlayson. BC’s carbon tax doesn’t let polluters off. The Vancouver Sun, August 6 2008.

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new mines on the drawing board promising steady growth in production, the provincial government could embrace a revenue-neutral carbon tax in 2008 without fear for local jobs or government revenues. As the level of the tax increased over time, concerns about business competitiveness did emerge, led as expected by the emissions-intensive, trade- exposed sectors of aluminum, cement, and petroleum refining.However,the silence of the coal sector is again noteworthy. Also, although British Columbia’s carbon tax faced strong partisan opposition, the government’scriticsnever pointed to the province’s growing carbon exports. The environmental community applauded the tax when it was introduced without acknowledging BC’s greater contribution to climate change via coal exports, which by 2013 yielded roughly 100 MtCO2eq downstream, compared to the province’s own emissions 47 of roughly 60 MtCO2eq. At the limit, the Vancouver Fraser Port Authority boasts without irony of using fossil-free hydropower to load ships, a large fraction of which are being loaded with coal. Consistent with the forgoing hypotheses, the BC case revealed opposition from emissions-intensive, trade-exposed industries, reliance on product rather than process standards to shift costs to imports, and indirect support from an export-oriented fossil fuel sector with low emissions intensity. Two more recent developments in the BC case provide additional insight into the politics of carbon trade, however. The first is a comparison between the extraction emissions of coal and gas exports. BC has long produced natural gas, primarily for export. Although the sector has significant “fugitive” emissions from well and pipeline links, they were conveniently shielded from a carbon tax that applies only to fossil fuel combustion. However, in 2012 the provincial government announced a plan for dramatically expanded production of liquefied natural gas (LNG) for export. Proposed LNG exports will be much more emissions-intensive than in the past, a result of both increasing reliance on fracking and the expectation that some of the gas will be burned to power the liquification step. At the limit BC’s total carbon emissions could double.48 The greater emissions intensity of gas production, compared to coal extraction, is already testing provincial climate leadership. The government exempted proposed LNG plants from the renewable energy requirement and is reportedly reconsidering its 2020 emissions target. The second development concerns a special case of exports in transit, in contrast to those produced domestically. In recent years, opposition has emerged in BC to proposals for new fossil fuel export infrastructure, including two bitumen pipelines and a new coal port. Transit of fuel produced elsewhere represents a special case of minimal economic benefits but potential environmental risks to the transit jurisdiction. The fact that the oil in the proposed pipelines would originate in Alberta, and the coal for the new terminal in the US, thus has facilitated local opposition. In contrast, exports of LNG exports and

47. Author’s calculations based on annual reports of Port Metro Vancouver and Port of Prince Rupert. 48. Clean Energy Canada 2013.

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BC’s own coal, which promise both local jobs and signiﬁcant government roy- alties, have not engendered comparable opposition.

Norway

Norway’s climate leadership goes back to 1991, when it was the second country in the world (after Finland) to adopt a carbon tax. Since then, Norway has joined the EU Emissions Trading System (ETS), with the result that 80 percent of its emissions are now covered by one or the other form of carbon pricing.49 Norway has established ambitious climate action targets to “reduce global greenhouse gas emissions by 30 percent of Norway’s emissions by 2020” relative to 1990, and to achieve full carbon neutrality by 2050. Like British Columbia, Norway has taken advantage of its geography to meet virtually all of its electricity needs with hydropower. However, Norway is also a net fossil fuel exporter. As reported in Table 1, it exports roughly ten times as much extracted carbon as it releases within its borders. As with BC, the primary reasons for Norway’s leadership on climate change lie elsewhere, including a surge in public attention to climate change in the late 1980s and a proportional electoral system that provides stronger expression for green votes.50 However, it is striking that Norway’s oil and gas exports have not de- terred actions to reduce territorial emissions. As Lindseth observes, “There is little discussion in Norway about whether petroleum should be extracted or not— it is a given that [Norway] should do this; rather, the discussion is about how it should be extracted, that is, the rate and place of extraction.”51 Opposition to Norway’s carbon tax was led by the emissions-intensive, trade-exposed steel, aluminum, paper, and chemical industries, which suc- ceeded in securing an original exemption, and also defeated subsequent efforts to extend the tax to them in 1994 and 1998. In contrast, the offshore oil and gas industry did not gain a waiver for its territorial emissions. Kasa describes the greater tax burden on the oil industry compared to “some of Norway’smost emissions-intensive industries” as a “contradiction,” curiously overlooking that the industry’s products work by producing greenhouse gas emissions.52 Lindseth recounts the national government’s decision to approve a gas pipeline over local government opposition on the grounds that Norway’s gas consumption would reduce the need for more carbon-intensive imports.53 In so doing, the government opted to assume responsibility for consumption emissions, to the beneﬁt of local industry. Skjaerseth describes a “ﬁerce environmental struggle” over proposed gas plants that would increase territorial emissions.54 Like the Port of

49. Skjaerseth 2014. 50. Kasa 2000. 51. Lindseth 2006, 742–743. 52. Kasa 2005. 53. Lindseth 2006. 54. Skjaerseth 2014.

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Vancouver, Norway pressures offshore rigs to power their operations with clean hydro-power. Yet in none of these cases did either the environmental community nor governments acknowledge the ten times greater emissions that will occur when Norway’s oil and gas exports are burned elsewhere. Even with low carbon intensity of extraction, by virtue of its scale Norway’s petroleum production still contributes roughly one quarter of territorial emissions. The oil and gas sector is also the primary source of projected emissions growth. The careful wording of Norway’s target—to “reduce global greenhouse gas emissions”—reﬂects a multi-party compromise to reconcile Norway’s commitment to mitigating climate change with continuing oil and gas production through two strategies: investment in emissions reductions in developing countries, particularly to halt deforestation, in order to offset growth in Norwegian territorial emissions, and piloting of carbon capture and sequestration technology at home.55 Yet Norway’s commitment to reducing “global emissions” refers to global strategies to offset its own territorial emissions, not the global emissions that result from combustion of Norway’s petroleum exports. Indeed, Norway has boasted of doubling its carbon tax on production-related emissions from the oil industry, even while expanding offshore oil exploration in the Barents Sea.56 Perhaps the ultimate irony is a recent debate over partial divestment of Norway’s sovereign wealth fund from tar sands and coal, when the money in the fund continues to be derived exclusively from Norway’s own petroleum industry. As in BC, it is easier to undertake measures to limit territorial emissions with the conﬁdence that income and tax revenues from fossil fuel exports are secure. The approximately $500 million (NOK 3 billion) in public sector funds committed per year to global offsets are largely derived from the state-owned oil industry. Similarly, Tracy argues that Norway’s success in conserving carbon in private forestlands is facilitated by the oil industry, since owners of woodlots no longer rely on their land for primary income.57 Public debate concerning the global impact of Norway’s oil production has emerged only recently. In the 2013 election, several parties acknowledged the tension between climate action and expansion of oil drilling.58 However, only the Green Party called for a restriction of oil production, and it won just one seat among 169 in the national legislature.59

Conclusions

International trade creates the potential for geographic separation of the three links in the carbon supply chain—fossil fuel production, fossil fuel combustion,

55. Skjaerseth 2014. 56. Severin Carrell. Norway to Double Carbon Tax on Oil Industry. The Guardian,October11, 2012. 57. Tracy 2014. 58. Endre Tvinnereim, personal communication. 59. Skjaerseth 2014.

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and consumption of goods and services. This article builds on recent analyses by economists and physical scientists by examining the implications of international carbon flows for domestic politics. In particular, the article has considered three distinct roles countries play in international carbon trade: exporter of fossil fuels, producer of goods for export, and importer of goods for consumption. It has been argued that both the export of fossil fuels and the import of embodied carbon reduce political opposition to abatement of a country's own territorial emissions. Past analyses of trade in carbon-intensive goods have tended to overlook the distinctive characteristics of trade in fossil fuels. In many respects, the politics of emissions associated with fossil fuel extraction are comparable to other forms of production emissions. The more trade-exposed and emissions-intensive fossil fuel producers are, the greater the political opposition to abatement of territorial emissions. However, not all fossil fuel production entails significant territorial emissions, whether at the point of extraction or as a result of combustion of locally produced fuels. Two such cases, Norway and British Columbia, thus provide an opportunity to examine the implications of fossil fuel exports as distinct from production and export of embodied carbon. Perhaps surprisingly, with modest extraction emissions and limited combustion of locally produced fuels, fossil fuel production did not deter climate leadership by these jurisdictions, and arguably provided economic reassurance to support bold policies to mitigate territorial emissions. While these outliers may seem unique, the divergence between trade in fossil fuels and trade in embodied carbon in these jurisdictions helps to unpack the implications of economic activities that often coexist in other economies. Of course, fossil fuels are quite unlike other exports in the extent of downstream environmental consequences. BC and Norway also illustrate the degree to which the downstream consequences of fossil fuel exports are neglected, even in discussions of responsibility for global climate change. As Davis and Caldeira observe, “Everyone along the supply chain has a vested interest in our fossil- fueled global economy. Those who mine coal or pump oil benefit from selling the fuel. Those who use the fossil fuel to produce a good or service benefit from relatively low costs and a high degree of reliability. And those who consume goods and services benefit by being able to buy those products at lower prices.”60 The current assignment of responsibility to territorial emissions is not the only option, nor is it neutral. The status quo benefits countries that import carbon- intensive goods and disadvantages those that export consumer goods.61 Similar- ly, the onus on territorial emissions benefits countries that export fossil fuels and disadvantages fossil fuel importers. This article has examined the implications of trade in embodied and extracted carbon for domestic politics in the context of the current norm of responsibility for territorial emissions. Political opposition to emissions abatement is

60. Davis and Caldeira 2010, 8534. 61. Peters 2008.

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reduced because countries are not responsible for the upstream and downstream emissions to which they contribute. It is a separate question whether assignment of responsibility for the full life cycle of emissions to either the point of fossil fuel production or final product consumption could yield more favorable international politics. Responsibility for consumption-related emissions offers the advantages of shielding competitiveness of domestic producers and shifting some fraction of mitigation costs to other countries, though only for net importers of embodied carbon. There would be practical challenges to measuring carbon flows beyond one’s borders, as well as normative considerations given a transfer of carbon pricing revenues from developing to developed countries. It would be more straightforward to assign responsibility for eventual emissions to the country that produces the fossil fuels. However, even in the context of an international agreement, there would be a temptation for exporters to reduce their prices to undercut competitors, thus undermining an agreed carbon price. Still, Martin points to the examples of uranium exporters who have jointly specified conditions for use of their product and OPEC members that have foregone price competition, albeit to a different end.62 In fact, Ecuador has proposed that OPEC nations apply a carbon tax of up to 5 percent to their exports.63 The proposal to earmark revenues for the Green Climate Fund would promote climate justice as well as reinforcing the tax in the face of price competition.

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