EC O LO G I CA L E C O N O M I CS 6 5 ( 2 00 8 ) 1 3–2 3

a v a i l a b l e a t w w w. s c i e n c e d i r e c t . c o m

w w w. e l s e v i e r. c o m / l o c a t e / e c o l e c o n

METHODOLOGICAL AND IDEOLOGICAL OPTIONS

From production-based to consumption-based national

emission inventories

Glen P. Peters⁎
Industrial Ecology Programme, Norwegian University of Science and Technology (NTNU), NO-7491 Trondheim, Norway

AR TIC LE I N FO ABS TR ACT

Article history: Under the United National Framework Convention of Climate Change (UNFCCC) countries
Received 22 August 2007 are required to submit National Emission Inventories (NEI) to benchmark reductions in
Received in revised form greenhouse gas (GHG) emissions. Depending on the definition and system boundary of the
10 October 2007 NEI, the mitigation options and priorities may vary. The territorial system boundary used by
Accepted 16 October 2007 the UNFCCC has been critiqued for not including international transportation and
Available online 15 January 2008 potentially causing carbon leakage. To address these issues, past literature has argued in
favour of using consumption-based NEI in climate policy. This article discusses several
Keywords: issues in moving from the standard production-based NEI to consumption-based NEI. First,
Emission inventory two distinct accounting approaches for constructing consumption-based NEI are presented.
Carbon leakage The approaches differ in the allocation of intermediate consumption of imported products.
Shared responsibility Second, a consistent method of weighting production-based and consumption-based NEI is
Multi-regional input–output discussed. This is an extension of the previous literature on shared responsibility to NEI.
Kyoto Protocol Third, due to increased uncertainty and a wide system boundary it may be difficult to
Clean Development Mechanism implement consumption-based NEI directly into climate policy. Several alternative options
for incorporating consumption-based inventories into climate policy are discussed.
© 2007 Elsevier B.V. All rights reserved.

1. Introduction The two main critiques of the UNFCCC territorial system

The United Nations Framework Convention on Climate Change
(UNFCCC) requires parties to submit annual National Emission
Inventories (NEI) to benchmark progress towards the goals of
the UNFCCC.1 The UNFCCC system boundary “include[s] all
greenhouse gas emissions and removals taking place within
national (including administered) territories and offshore areas
over which the country has jurisdiction” (IPCC, 1996, pp.5). The
optimal mitigation activities taken by an individual country
may depend on the definition of the NEI and consequently, the
system boundary and definitions used in the NEI are critical.
boundary are that international transportation is not allocated
to countries and there is potential for carbon leakage (Peters
and Hertwich, 2008). International transport is difficult to
allocate due to problems with assigning responsibility and
poor data (Olivier and Peters, 1999). Currently, the UNFCCC has
not decided on how bunker fuels for international transport
should be allocated to individual countries, but several
proposals have been suggested and analysed (den Elzen
et al., 2007). Harmonizing the economic and environmental
system boundary as for Gross Domestic Product (GDP) is an
established and consistent method of allocation that is

⁎ Tel.: +47 7359 8938; fax: +47 7359 8943.

E-mail address: glen.peters@ntnu.no.
1
The NEI reports direct anthropogenic emissions by sources and removals by sinks of greenhouse gases (GHG)—carbon dioxide (CO2),
methane (CH4), nitrous oxide (N2 O), hydrofluorocarbons (HFCs), Per-flurocarbons (PFCs), and sulphur hexafluoride (SF6)—disaggregated
into six sectors—Energy, Industrial processes, Solvents, Agriculture, Land Use, Land-Use Change and Forestry (LULUCF), and Waste.

0921-8009/$ – see front matter © 2007 Elsevier B.V. All rights reserved.
doi:10.1016/j.ecolecon.2007.10.014
14 E CO L O G I CA L E CO N O MI CS 65 ( 20 0 8 ) 1 3–2 3
followed in this article (Gravgård Pedersen and de Haan, 2006;
Peters and Hertwich, 2008). Despite its importance, the
allocation of international transportation is not the primary
focus of this article.
The other main critique of the territorial boundary used by
the UNFCCC is that carbon leakage through imports from non-
Annex I to Annex I countries can become problematic.2 In fact,
the Kyoto Protocol to the UNFCCC explicitly states that
“Parties… shall strive to implement policies and measures…
in such a way as to minimize adverse effects… on interna-
tional trade”. Additionally, the “[i]nventories are to be reported
without adjustments relating, for example, to climate varia-
tions or trade patterns of electricity” (UNFCCC, 2004). Denmark
has attempted to have its NEI adjusted due to seasonal
variations in electricity trade with the decision still pending3
(Munksgaard et al., 2005). Recent research has shown that
around 5 Gt of CO2 is embodied in the international trade of
goods and services most of which flows from non-Annex I to
Annex I countries (Peters and Hertwich, 2007, in press). This
indicates that there is merit in considering trade-adjusted NEI
in more detail.
The current UNFCCC NEI are production-based—in effect
domestic production including exports—and many critiques
suggest the use of consumption-based inventories which
subtract exports but include imports (Kondo et al., 1998;
Munksgaard and Pedersen, 2001; Lenzen et al., 2004; Munks-
gaard et al., 2005, 2007; Wilting and Vringer, 2007; Peters and
Hertwich, 2006a, in press). Consumption-based NEI have
several advantages in addition to accounting for international
trade—such as, covering more of global emissions with limited
participation, increasing mitigation options, naturally encour-
aging cleaner production, and making policies such as the
Clean Development Mechanism (CDM) a natural part of the NEI
(Peters and Hertwich, 2008). However, consumption-based NEI
suffer three key disadvantages of interest in this article. First,
they require more complex calculations and hence assump-
tions and increased uncertainty. Second, they shift from one
extreme—production—to another—consumption—which
may be alleviated by using shared responsibility (c.f. Lenzen
et al., 2007). Third, they require political decision making to
extend outside of the standard geo-political region (generally a
country). These three disadvantages are expanded on here and
then elaborated on in detail in the main article.
Consumption-based emission inventories are initially
constructed by converting technology-based inventories—
2 they may be used in practice.
There is a significant literature on carbon leakage in NEI
(Wyckoff and Roop, 1994; Kondo et al., 1998; Munksgaard and
Pedersen, 2001; Ahmad and Wyckoff, 2003; Lenzen et al., 2004;
Munksgaard et al., 2005; Wilting and Vringer, 2007; Peters and
Hertwich, 2008, in press). These studies are primarily interested
in the “weak” definition of carbon leakage (c.f. Rothman, 1998;
Peters and Hertwich, in press) which considers all trade from
non-Annex I to Annex I countries. The IPCC uses a “strong”
definition of carbon leakage which only consider general
equilibrium effects (IPCC, 2007).
3
http://www2.dmu.dk/1_viden/2_miljoe-tilstand/3_luft/
4_adaei/Progress_toward_tagets_en.asp.
generally the source of the UNFCCC inventories—to produc-
tion-based inventories consistent with the System of Nation-
al Accounts (SNA; United Nations, 1993). This first step is an
extension of the SNA and is often referred to as the National
Accounting Matrix including Environmental Accounts
(NAMEA; SEEA, 2003; Gravgård Pedersen and de Haan, 2006).
In the second step, the production-based inventories are
reallocated to a consumption-based inventory generally
using input–output analysis (IOA). It is this later step which
is of most interest in this article. Recent developments in
methodology and improved data have allowed the use of
multi-regional input–output analysis (MRIOA; Wiedmann
et al., 2007a, provides a review) to construct consumption-
based inventories4 (Ahmad and Wyckoff, 2003; Lenzen et al.,
2004; Peters and Hertwich, 2007, in press; Wilting and Vringer,
2007). However, there are two key accounting approaches for
consumption-based NEI that differ in the way they allocate
imports for intermediate consumption (Peters, 2007). The
first section of this article compares these methods.
Some authors have argued that production-based NEI and
consumption-based NEI represent two extremes and it is
beneficial to share responsibility between the producer and
consumer (Kondo et al., 1998; Ferng, 2003; Bastianoni et al.,
2004; Gallego and Lenzen, 2005; Rodrigues et al., 2006; Lenzen
et al., 2007). Initial attempts at sharing responsibility in NEI
led to problems of double counting, which has now been
resolved with further theoretical developments (Gallego and
Lenzen, 2005). However, much of the discussion of shared
responsibility has focused on sharing between the producer
and a consumer for a fixed final consumption at the subna-
tional level. Production-based and consumption-based NEI
require sharing responsibility between different final con-
sumptions—one that includes exports and one that includes
imports (Munksgaard and Pedersen, 2001). The second
section of this article extends the shared-responsibility
concept specifically to production-based and consumption-
based NEI.
A consequence of using consumption-based NEI is that a
portion of the emissions occur outside of the political
administered region where the consumption occurred (Peters
and Hertwich, 2006b). While this opens new options for
mitigation (Peters and Hertwich, 2008), it also changes the
political economy of climate mitigation. It is difficult to
understand how purely consumption-based NEI may lead to
deeper emission reductions than production-based invento-
ries. Despite possible advantages of using consumption-based
NEI, the political dimension may hinder them as the sole NEI.
The third section of this article expands on the various
implementation issues of consumption-based NEI and how
4
Methods other than IOA exist to construct consumption-based
inventories. Most ecological footprint calculations do not use IOA
but provide a consumption-based inventory (Wackernagel and
Rees, 1996; Kitzes et al., 2007). It has been suggested that the
ecological footprint can be improved using MRIO (Turner et al.,
2007; Wiedmann et al., 2007b). It is also possible to use hybrid
methods to improve accuracy while retaining a broad system
boundary (e.g. Suh et al., 2004).
 EC O LO G I CA L E C O N O M I CS 6 5 ( 2 00 8 ) 1 3–2 3 15

Using this formulation, the domestic environmental

2. Accounting for imports in consumption-based impacts are calculated as,
inventories !
1
X
f r ¼ Fr xr ¼ Fr ðI  Arr Þ yrr þ ers ð7Þ
Recent approaches to construct consumption-based emis- s
sions NEI have used MRIOA (Ahmad and Wyckoff, 2003;
Lenzen et al., 2004; Wilting and Vringer, 2007; Peters and where I is the identity matrix and F is a row vector with each
Hertwich, 2007, in press). However, two key approaches to element representing the environmental impact per unit
accounting for imports to intermediate consumers have been industry output. The emissions, f r, occur domestically to
posed with implications for the construction of NEI (Peters, produce both the domestic component of final consumption
2007). In this section the two approaches are introduced and and total exports.
discussed in relation to NEI. For this, it is necessary to develop At this point two main approaches exist to determine the
some background to IOA and MRIOA.5 environmental impacts of imported goods and services. One
The standard IOA framework begins with an accounting considers total bilateral trade between regions (EEBT) and the
balance of monetary flows (United Nations, 1999), other considers trade to final consumption and endogenously
determines trade to intermediate consumption (MRIO).
xr ¼ Ar xr þ yr þ er  mr ð1Þ

where x is the vector of total output in each sector, y is a vector 2.1. Using total trade flows (EEBT)
with the each element representing final consumption—
households, governments, and capital—in each industry The emissions embodied in bilateral trade (EEBT) are calculated
sector (domestic plus imports), e is the vector of total exports, directly using monetary bilateral trade statistics. This method
m is the vector of total imports (for both intermediate and determines the emissions in one region, r, to produce the bilateral
final consumption), A is a matrix of intermediate consumption trade flow ers, and these are the emissions embodied in trade from
where the columns represent the input from each industry region r to region s. This method does not split the bilateral trade
(domestic plus imports) to produce one unit of output for each flow into components to intermediate and final consumption.
domestic industry, and Ax is the vector of total intermediate A key assumption employed in IOA is that the production
consumption. This balance equation holds in all regions, r. The technology is based on fixed proportions (i.e. in a given sector,
total trade components can also be expressed using bilateral the production for domestic demand has the same character-
trade data from region r to region s, ers. The total exports are istics as the production for exports). This allows Eq. (7) to be
decomposed into components for domestic demand on
X
er ¼ ers ð2Þ domestic production in region r
s
1
f rr ¼ Fr ðI  Arr Þ yrr ð8Þ
and by symmetry the total imports are
X and the EEBT from region r to region s
mr ¼ esr ð3Þ
s 1
f rs ¼ Fr ðI  Arr Þ ers ð9Þ
To perform analysis with this model the imports are By summing over the importing regions, the total emis-
usually removed from the system (following United Nations, sions embodied in bilateral trade for exports (EEBT-E) from
1999; Peters and Hertwich, 2007), region r to all other regions can be determined,
X X
xr ¼ Arr xr þ yrr þ ers ð4Þ f r⁎ ¼ f rs ð10Þ
s s

which expresses the same balance as in Eq. (1), but using only and reversing the summation gives the emissions embodied
domestic activities. The final consumption is decomposed as, in bilateral trade for imports (EEBT-I) into region r from all
X other regions
yr ¼ yrr þ esr ð5Þ X
s
f ⁎r ¼ f sr ð11Þ
s
and the intermediate consumption is decomposed as
X Using the EEBT model the production-based NEI are the
Ar ¼ Arr þ Asr ð6Þ emissions in region r from residential institutions to produce
s
domestic final demand and all exports,
where Arr represents the industry requirements of domesti-
cally produced products and Asr represents the industry fpr ¼ f rr þ f r⁎ ð12Þ
requirements of imported products from region s to region r.
The consumption-based NEI are the emissions from total
domestic consumption, which excludes exports but includes
imports
5
This article considers methods of constructing NEI using IOA
and not methods for modelling, for example, economic impacts of fcr ¼ f rr þ f ⁎r ð13Þ
mitigation based on the use of a certain NEI. However, since many
models use IOA to describe interindustry transactions, then the In both inventories, the direct household emissions can be
methods described here are relevant for modellers. included in f rr.
16 E CO L O G I CA L E CO N O MI CS 65 ( 20 0 8 ) 1 3–2 3

The production-based inventory presented here differs from where each submatrix in the block-matrix represents the
the UNFCCC territorial-based inventory in two key respects. The interactions between different countries; Ars is the trade
EEBT production-based NEI allocates emissions based on the between industries from region r to region s and yrs is the
economic activities of residential institutions as defined in the trade from industries in region r to final consumers in region
NAMEA and SNA, while the UNFCCC NEI only allocates s. The methods used to construct Ars and yrs from ers are
emissions occurring on national territory. Thus, for national discussed in the Appendix. Given the output in each region,
totals the production-based NEI includes international trans- the emissions can be calculated for the given final consump-
portation, while the UNFCCC NEI does not (Gravgård Pedersen tion or production vector,
and de Haan, 2006; Peters and Hertwich, 2008). At the sector level
the UNFCCC territorial and the production-based inventories f r ¼ F1 x1 þ F2 x2 þ N þ Fm xm : ð18Þ
differ in the method of allocation. The UNFCCC allocates to The final consumption in each region r is given by the vector
technologies—energy, industrial processes, solvents, agricul- 0 1
ture, LULUCF, and waste—while the NAMEA definition reallo- y1r
B y2r C
cates the emissions to industry sectors. This reallocation B C
cr ¼ B 3r C
By C ð19Þ
introduces further uncertainty. Consequently, the UNFCCC @ v A
and production-based inventories produce different national ymr
totals with similar uncertainty, but the production-based
inventories have more uncertainty at the sector level. where yrr is the final consumption produced domestically and
yrs is imported final consumption. The final production in each
2.2. Using trade to final consumers (MRIO) region r is given by the vector
0 1
0
While the EEBT methodology is conceptually sound it is not B v C
B C
applicable for arbitrary final consumption. The EEBT model B 0P C
B rr C
determines the emissions occurring in one region to produce p ¼B
r
By þ
rs C
sy C ð20Þ
B 0 C
the total exports to another region, but it does not determine the B C
@ v A
total emissions to produce a given product since imports are
0
usually required to produce the exports. For instance, to
calculate the emissions embodied in the production of a car in Using the MRIO model the production-based NEI are
region A, one must first determine the production levels and constructed using the final production7 vector,
emissions occurring in region A. Production in region A requires
imports from B and C. The resulting production and emissions fpr ¼ FðI  AÞ1 pr ð21Þ
in regions B and C also require imports from other regions, and
and the consumption-based NEI are constructed using the
so on. This process continues indefinitely through the global
final consumption vector,
production system. This type of analysis is performed using
Multi-Regional Input–Output Analysis (MRIOA). fcr ¼ FðI  AÞ1 cr ð22Þ
A key difference between the EEBT model and MRIOA is
that the MRIO model6 distinguishes between trade that goes to where F is the vector of regional emission intensities and A
intermediate and final consumption. This can be performed represents the block-A matrix in Eq. (17). Importantly, since
by splitting the bilateral trade data into final consumption, y, the MRIO model is based on decomposing the EEBT model into
and intermediate consumption, z, intermediate and final consumption, the total global emis-
sions remain the same.
ers ¼ zrs þ yrs ð14Þ

The exports to industry can be expressed as 2.3. Discussion

zrs ¼ Ars xs ð15Þ The MRIO and EEBT production-based and consumption-
s
where x represents the output in region s. By substitution of the based NEI differ in the way they treat intermediate production
decomposed exports into Eq. (4) the standard MRIO model results, of imported products. Neither method is correct nor incorrect,
X X they just have a different method of allocation. Calculations
xr ¼ Arr xr þ yrr þ Ars xs þ yrs ð16Þ have shown that the differences between the MRIO and EEBT
spr spr
allocation can be in excess of 20% for some countries
By considering the equation in each region the matrix form depending on their trade structure (Peters, 2007; Weber and
is obtained, Matthews, 2007). This section gives a brief overview of the
0 1 1 0 11 12 13 10 1 1 0 P 1r 1 advantages and disadvantages of the two approaches.
x A A A N A1m x ry
B x2 C B A21 A22 A23 N A2m CB x2 C B P y2r C
B C B CB C B Pr 3r C
B x3 C ¼ B A31 A32 A33 N A3m CB x3 C þ B C ð17Þ
B C B CB C B ry C 7
The notion of “final production” only considers the production
@ v A @ v v v ⋱ v A@ v A @ P v A
xm Am1 Am2 Am3 N Amm xm mr for exported final consumption and not total production within a
ry
country. While final production is consistent with final consump-
tion, it is a rarely discussed concept. For instance, to avoid
6
Peters (2007) calls this Emissions Embodied in Consumption confusion Bang et al. (in press) compare final consumption with
(EEC). total production.
 EC O LO G I CA L E C O N O M I CS 6 5 ( 2 00 8 ) 1 3–2 3 17

The two models differ in the allocation of imports to Table 1 – A comparison of the EEBT and MRIO models for
intermediate consumption. The EEBT model considers total constructing consumption-based NEI
consumption—intermediate plus final—through the use of Criteria MRIO EEBT
bilateral trade data. Since total consumption is considered,
System Global emissions from final Domestic
only the emissions occurring in each region are calculated to
boundary consumption emissions from
avoid double counting (c.f. Ferng, 2003). In the MRIO model the total consumption
exogenous demand is always a final consumption, with the Trade data Bilateral trade split between Bilateral trade
domestic and imported intermediate consumption deter- intermediate and final data (total
mined endogenously. To produce the final consumption, cr consumption consumption)
(Eq. (19)), the MRIO model produces the output Allocation of To final consumption To producing region
intermediate
0 1
x1r imports
B x2r C Comparable to Yes No
xcr ¼ B
@ v A
C ð23Þ
LCA
mr
x Comparable to No Yes
bilateral trade
rr rs
where x represents the output in region r and x represents data
the output in region s. This model includes all possible Complexity High Low
feedbacks in the MRIO model, so that xrr is not only the output Transparency Low High
to produce yrr but also the output to produce intermediate Applications Product or consumption National Emissions
specific Inventories
exports to other regions to produce both yrr and yrs. It is
Global In-depth studies Limited to bilateral
possible to determine xc r for all regions r and allocate this to production trade flows
each region, xr = ∑sxrs retrieving the total output in each region analysis
as obtained in the EEBT model.8 This emphasises that the
MRIO model is a decomposition of the EEBT model that differs
in the allocation of emissions to countries, but not in the global across final consumers for final consumption. In this sense,
emissions. The MRIO model uses final consumption and both the EEBT and MRIO models distinguish between trade to
considers global emissions, while the EEBT model uses total intermediate and final consumption.9 In the modelling
consumption and considers domestic emissions only. framework, however, only the MRIO model further splits the
While the two different approaches may cause confusion, bilateral trade data into intermediate and final consumption,
they do serve different purposes. Essentially, the models dif- see (14) and the Appendix. It is this split which gives rise to
fer in the way they allocate imports to intermediate con- the difference between the MRIO and EEBT models. Therefore,
sumption—imports which are used in the production of the difference between the two models is primarily due to
exports—“through-trade” (Peters, 2007; Weber and Matthews, different modelling frameworks and not different data
2007). The imports into a country have three main uses: 1) manipulations.
direct imports to final consumption, and imports to interme- Table 1 shows key differences between the EEBT and MRIO
diate consumption for the production of 2) domestic final models. The EEBT model is relevant for considering the
consumption and 3) exports (through-trade). The EEBT model environmental impacts of aggregated exports from and
allocates all imports to the country of import; that is, options 1, imports to a country. The EEBT model is directly comparable
2, and 3 are allocated to the importing country. The MRIO to trade balances used in the SNA and is simple and
model allocates the imports to the final consumer, thus, 1 and transparent. In terms of policy, since the EEBT model only
2 are allocated to the importing country, while 3 (through- considers bilateral trade then it is more consistent with
trade) is “passed-on” until it is eventually embodied in a good bilateral political agreements between countries. The MRIO
or service sold to a final consumer. In a complex global model is more applicable to the analysis of final consumption
production system, the import may be passed-on through and analogous to LCA which consider the total emissions from
many countries before it is eventually allocated as final raw-material extraction to final consumption—although
consumption. MRIO models do not usually directly consider product use.
It is worth elaborating on the different treatment of the The MRIO model also allows for more detailed studies and
trade data in the models to distinguish whether the differ- decompositions of global production systems using tools such
ences arise due to data manipulations or the modelling as structural path analysis (Peters and Hertwich, 2006b) or
framework. Both the EEBT and MRIO models rely on decom- measuring over-consumption in the Ecological Footprint
posing the IOT into a domestic and imported component, (Wiedmann et al., 2007b). The cost for the extra detail in the
compare Eqs. (1) and (4). At this stage it is necessary to split the MRIO model is added complexity and hence a loss of
import data across sectors for intermediate consumption and transparency. Overall, the MRIO model is better for the
analysis of final consumption, while the EEBT model is
arguably better for analysis of trade and climate policy
8
where transparency is important.
Lenzen et al. (2004) consider three versions of the MRIO model.
Their Scenario III is equivalent to the MRIO model presented here.
Scenarios I and II are simplifications of the MRIO model. Scenario
II is not the EEBT model as presented here as they consider final
9
consumption. A reviewer emphasised this point.
18 E CO L O G I CA L E CO N O MI CS 65 ( 20 0 8 ) 1 3–2 3

consumption-based NEI. Summation over all regions r pro-

3. Sharing responsibility between production- duces the total global emissions without double counting,
based and consumption-based inventories X X X XX
f¼ Frt yrr þ ð1  /Þ Frt ers þ / Fst esr ð29Þ
r r s r s
There have been several articles that discuss sharing responsi-
bility between the “producer” and the “consumer” (Bastianoni et X X X X X
¼ Frt yrr þ ð1  /Þ Frt ers þ / Frt ers ð30Þ
al., 2004; Rodrigues et al., 2006; Lenzen et al., 2007), however these r r s r s
articles do not share responsibility between different NEI (as in
!
Ferng, 2003). It is worth elaborating on this to avoid confusion. X X
¼ Frt rr
y þ ers
ð31Þ
Given a final consumption vector, emissions can be r s
allocated to either the “consumer”
X
consumer 1 ¼ fr ð32Þ
f ¼ FðI  AÞ ⁎diagðyÞ ð24Þ r

or the “producer” where for the second line the indices on the last summation
were relabelled.
f producer ¼ F⁎diagðxÞ; x ¼ ðI  AÞ1 y: ð25Þ
3.2. Using trade to final consumers only (MRIO)
In both cases, the total emissions are the same, however, the
methods differ by which entity is allocated the emissions (Peters
Similar to the EEBT inventories, it is possible to weight the
and Hertwich, 2006b; Gallego and Lenzen, 2005; Lenzen et al.,
production-based and consumption-based MRIO NEI for final
2007). In the case of the producer, the emissions are allocated to
production and consumption,
the resident institution (industry) that emits the pollution in
production—this will generally be the energy-intensive indus- fsr ¼ ð1  /Þfpr þ /fcr ð33Þ
tries, such as electricity generation, metals production, and so
on. In the case of the consumer, the emissions are allocated to ¼ ð1  /ÞFt pr þ /Ft pr ð34Þ
the final consumer—for households, this will generally be food,
0 1 0 1 0 1r 1
shelter, transport, services, and so on. Most articles discuss 0 0 y
sharing responsibility between these consumers and producers B v C B v C B y2r C
B rr C B P rs C B C
for a “fixed” final consumption (Bastianoni et al., 2004; Lenzen et ¼ Ft B C B C B 3r C
B y C þ ð1  /ÞFt B s y C þ /Ft B y C ð35Þ
@ v A @ v A @ v A
al., 2007), even though they often discuss consumption-based
0 0 ymr
and production-based NEI. Rodrigues et al. (2006) and Gallego
and Lenzen (2005) consider similar issues, but in relation to 0 1
/y1r
upstream and downstream emissions. B v P C
B C
For NEI, responsibility must be shared between different ¼ Ft B
B y rr
þ ð1  /Þ s y rs C
C ð36Þ
final consumption vectors (Ferng, 2003). Production-based NEI @ v A
include exported products, while consumption-based NEI /y mr

subtract exports but include imports (Munksgaard and Ped-

ersen, 2001). In this case, sharing responsibility amounts to
weighting the emissions embodied in exports and imports.
In the following description ϕ will be used to represent the
weighting between the production-based and consumption-
based NEI; ϕ = 0 produces the production-based NEI and ϕ = 1
produces the consumption-based NEI, thus 0 ≤ ϕ ≤ 1. In both
cases, weighting the production-based and consumption-
based NEI amounts to weighting the final demand vectors
that are applied in the IO model.
3.1. Using total trade flows (EEBT)
By weighting the production-based and consumption-based
EEBT NEI, one obtains,
fsr ¼ ð1  /Þfpr þ /fcr
¼ f rr þ ð1  /Þf ⁎r þ /f r⁎
X X
¼ Frt yrr þ ð1  /ÞFrt ers þ / Fst esr
s s
where Frt = Fr (I − Arr)− l represents the total direct plus indirect
emission intensity. It is easy to verify that substitution of ϕ = 0
retrieves the production-based NEI and ϕ = 1 retrieves the
where for simplicity Ft = F(I − A)− l. As for the EEBT inventories, it
is possible to verify that the extremes of ϕ = 0, 1 produce the
consumption-based and production-based NEI, and that
summation over all r produces the correct global emissions
without double counting.
3.3. Discussion
In both of these formulations, the shared responsibility clearly
occurs in the final consumption and not between the output
and final consumption. This circumvents two types of double
counting that have been mentioned in past literature. The
framework developed by Gallego and Lenzen (2005) and
Lenzen et al. (2007) considers double counting when reporting
intermediate consumption. Since NEI only consider final
ð26Þ consumption, this type of double counting does not occur.
The double counting cited by Ferng (2003) does not appear in
ð27Þ this formulation because the emissions embodied in imports
are determined consistently. Double counting arose in Ferng
ð28Þ
(2003), not because of sharing responsibility, but rather
inconsistent treatment of imports—the imports were counted
twice.
In many respects the formulation here can be consid-
ered as an extension of the shared-responsibility framework
 EC O LO G I CA L E C O N O M I CS 6 5 ( 2 00 8 ) 1 3–2 3 19

developed by Lenzen et al. (2007). Lenzen et al. (2007) developed Table 2 – A comparison of the production-based and
a system of sharing responsibility between the producer and consumption-based NEI
consumer (or output and final consumption). Their method- Criteria Production-based NEI Consumption-based
ology is applied within a NEI. The framework developed here (territorial-based NEI) NEI
distributes responsibility between different NEI; a production-
Emissions Administered territory Global
based NEI and a consumption-based NEI. The two methodol- covered
ogies are not competing, but rather complimentary. Allocation Domestic production Domestic consumption
A problem with shared responsibility is that it is necessary Allocation of Includes exports, not Includes imports, not
to specify ϕ. Lenzen et al. (2007) use the value-added to share- trade imports exports
responsibility between consumers and producers. While it has Mitigation Domestic activities Domestic activities and
focus including exports imports (exports
not been investigated further in this article, a similar system
excluded)
could be used where the weights ϕ, are determined using the Comparability Consistent with GDP Consistent with
value-added embodied in exports and imports. Rodrigues et al. national consumption
(2006) consider a different strategy for sharing responsibility Consistent No Yes
that is an equal weighting of the upstream emissions with trade
embodied in consumption and the downstream emissions policy
Annex I Lower Higher
embodied in value-added.
emissions
When sharing responsibility between NEI, it is possible to
coverage
have a different weighting for different countries. It is possible Complexity Low High
to extend the present framework to include a regional specific Transparency High Low
weighting, ϕr, so that the weighting varies between countries Uncertainty Lower Higher
or regions—for instance, there may be different weights for Current Relatively high Low with current data
Annex I to Annex I, Annex I to non-Annex I, and non-Annex I country
coverage
to non-Annex I.
Mitigation Domestic mitigation Global mitigation
analysis only

4. Implementing consumption-based The UNFCCC territorial-based NEI are the same as the production-
based inventory but do not allocate international transportation.
emission inventories

Several authors have discussed the advantages in using

consumption-based NEI (Kondo et al., 1998; Munksgaard and
Pedersen, 2001; Lenzen et al., 2004; Munksgaard et al., 2005,
2007; Peters and Hertwich, 2008, in press). Key advantages of
consumption-based NEI include eliminating carbon leakage
through imports, covering more global emissions with
limited participation, consistency between consumption
and environmental impacts, increasing mitigation options,
and making policies such as the CDM a natural part of the
inventory (Peters and Hertwich, 2008). However, less atten-
tion has been given to how consumption-based NEI would be
implemented and lead to improved mitigation. The aim of
this section is to consider some options for implementing
consumption-based NEI in post-Kyoto climate policy. Table 2
gives an overview of the key differences between the
production-based and consumption-based NEI. The territo-
rial-based NEI used by the UNFCCC is considered equivalent
to the production-based NEI, except the UNFCCC inventories
do not allocate international transportation.
4.1. Problems with consumption-based emission
inventories
Production-based NEI are much closer to the statistical
sources and hence they have less uncertainty. Increased
uncertainty in consumption-based NEI arises in two places:
first, a reallocation of emissions from technologies to sectors,
and second, the inclusion of imports. Generally, NEI are
constructed using fuel consumption in different technologies
(e.g. Hoem, 2006) and this is well suited to the sectors used for
UNFCCC reporting. For consumption-based NEI, the emis-
sions need to be allocated to economic sectors based on the
NAMEA (de Haan and Keuning, 1996) and this increases
uncertainty. Following this step, MRIOA is used to construct
the consumption-based NEI. This step increases uncertainty,
but this is rarely quantified (Lenzen, 2001; Lenzen et al., 2004;
Weber and Matthews, 2007). Since MRIOA assumes linear
proportions for interindustry transactions within and be-
tween regions, the GHG emission estimates for complex
production chains may have high uncertainty (analogous to
aggregation error, Lenzen et al., 2004). With a high level of
aggregation considerable detail is lost on product and
industry specific impacts. Further, consumption-based NEI
include data from all the trading partners of a particularly
country, elements of the inventory will contain different
levels of uncertainty (c.f. Subak, 1995) — for instance, the US
IOT may be more accurate than the Chinese IOT. Given
current data availability, it is not possible to estimate
consumption-based NEI for some countries (Dimaranan,
2006; Peters and Hertwich, in press). The level of uncertainty
in consumption-based NEI compared to production-based NEI
needs further quantification.
The allocation of international transport in both produc-
tion-based and consumption-based inventories has consider-
able uncertainty for several reasons. First, the underlying
bunker fuel data may be underestimated (Corbett and Koehler,
2003). Second, when constructing the NAMEA data for use in
IOA bunker fuels should be allocated according to resident
institutions (de Haan and Keuning, 1996). Due to poor
reporting, there is a high level of uncertainty in reallocating
bunker use to residential institutions. Further, the NAMEA
20 E CO L O G I CA L E CO N O MI CS 65 ( 20 0 8 ) 1 3–2 3
method is not followed consistently by all countries (Peters
et al., 2007a). Third, trade statistics for international transpor-
tation are necessary to convert the production-based NEI into
a consumption-based NEI. There is a high level of uncertainty
in the trade of international transportation. Thus, while it is
conceptually possible to consistently examine international
transportation in IOA, significant improvements in data are
necessary.
Production-based NEI include domestic activities and
hence are more consistent with GDP. GDP is a measure of
the total value of goods and services produced within a
country's borders in one year and is thus consistent with the
territorial-based NEI. The activities which contribute to GDP
within a country also generate pollution, so the institution
that profits from an activity must also be responsible for the
pollution. For instance, Norway is allocated the GHG
emissions from the extraction of oil and gas, but this also
boosts Norway's GDP. The argument for a consumption-
based NEI is that the country which consumes the goods and
services should be responsible for the emissions. In this
case, the importers of Norway's oil and gas are allocated the
GHG emissions embodied in the production of oil and gas,
but Norway is allocated nothing (c.f. Munksgaard et al.,
2005). This allocation shifts the burden entirely onto the
consumer of Norway's oil and gas, and not the producer.
This loss of responsibility for GHG emissions in Norway's oil
and gas sector may lead to less attention to mitigation. A
compromise between these two extremes is to share
responsibility between the production-based and consump-
tion-based NEI.
To overcome the extremes of using either a consump-
tion-based or production-based NEI, it is possible to share
responsibility between NEI. The original shared-responsi-
bility framework does not specify the proportions to share
responsibility (Gallego and Lenzen, 2005). Rodrigues et al.
(2006) argue that it is preferable to agree upon various
properties and theoretically derive an indicator to avoid
qualitative choices on sharing. Lenzen et al. (2007) argue
that value-added is a reasonable method to share respon-
sibility. The original rationale for weighting indicators was
to avoid double counting when intermediate consumers
report (Gallego and Lenzen, 2005), thus the arguments for
weighting NEI are not as strong. Further, when weighting
indicators together information and transparency is lost.
Thus, while weighting NEI may overcome the extremes of a
production-based or consumption-based indicator, weight-
ing will also reduce information and open issues on how to
share responsibility.
A closely related issue is that political power extends only
to administered territories. Thus, a government has the
authority to implement policies over the emissions (and
GDP) it generates. In a consumption-based system, the
emissions from different geo-political territories are allocat-
ed to the domestic economy. For instance, the US govern-
ment can implement an emissions trading system or carbon-
tax within the USA where it has political control, but not in
China where another government has control. Thus, a
consumption-based NEI requires greater collaboration
among countries probably through an international dialogue
such as the UNFCCC.
4.2. Advantages of consumption-based inventories
The real power of consumption-based NEI is to quantify how
much of a country's consumption occurs in other countries. If
the inventory determines that 10% of a country's footprint
occurs in China, for instance, then what policy action can be
used to reduce these emissions? There are two key issues
here: First, what political power does a country have to enforce
mitigation in a trading partner. Second, if the country pays for
mitigation in a trading partner then how are they attributed
the emission reductions? This section discusses options for
using the added information of consumption-based NEI in
post-Kyoto climate policy.
It is well recognized that the growing GHG emissions in
countries like India and China need attention (e.g. Liu and
Diamond, 2005). However, China and India are showing
resistance to specific emission targets as they may impede
their development goals. This is already a political challenge
in the post-Kyoto negotiations. Consumption-based NEI
quantify how much of China's and India's GHG emissions
are the result of exports to Annex I countries. While it is valid
to argue that the exports contribute to GDP in China and
India, it is also reasonable to argue that the exports are driven
by demand in other countries (Peters and Hertwich, 2006b;
Streets et al., 2006; Weber and Matthews, 2007; Peters et al.,
2007b). It may also be a political challenge to stop exporting
certain products. For instance, what would be the global
political fallout if Saudi Arabia decided to stop exporting oil
for environmental reasons? In addition, it may be desirable
for some countries to export energy-intensive products
(Peters and Hertwich, 2008) or low-cost but “dirty” countries
to produce and export goods with low use-phase emissions,
such as electric cars or compact-fluorescent lamps (Bang
et al., in press). Whoever is responsible for the emissions of
traded products can be debated, but it is clear that consump-
tion-based NEI provide valuable additional information that
should at least be considered in post-Kyoto negotiations.
The differentiated commitments in the Kyoto Protocol
were largely based on political negotiations and not scientific
or economic analysis (Babiker and Eckaus, 2002; Grubb, 2004).
A consumption-based NEI may help differentiate commit-
ments between countries. For instance, a country with a large
net import of GHG emissions may face a greater emission
commitment then one that has a large net export. In this case,
the NEI may remain the production-based NEI, but the
differentiated commitments are trade-adjusted using a con-
sumption-based NEI.
Consumption-based NEI are trade-adjusted and so are
suggestive of using trade measures to reduce GHG emissions.
Trade-measures in climate policy have been discussed
previously, often in the context of enforcement (Aldy et al.,
2001) and competitiveness concerns (Pauwelyn, 2007). If
enforcement in climate policy is strong, then it is likely that
participation is high and hence competitiveness concerns are
decreased—thus the two issues are closely related (Barrett and
Stavins, 2003). Probably the most discussed trade-measure is a
border-tax adjustment (BTA) to eliminate differential carbon
pricing between countries. While the discussions of the
legalities and complications of BTAs are appearing in the
literature (Ismer and Neuhoff, 2004; de Cendra, 2006), arguably
 EC O LO G I CA L E C O N O M I CS 6 5 ( 2 00 8 ) 1 3–2 3 21

a consumption-based NEI are a type of “border adjustment” 4.3. Discussion

but not in the form of a tax. However, by multiplying the
emissions embodied in imports within a consumption-based The discussions in this section do not argue to use a consump-
NEI gives a reasonable first estimate of a border-tax.10 A tion-based indicator as the sole NEI in climate policy. Given lower
consumption-based NEI reduces competitiveness concerns uncertainty, established reporting, consistency with political and
since exports are allocated to another country, but instead environmental boundaries, and wide-spread use, it is likely that
includes the foreign emissions to meet domestic consumption production-based inventories will remain dominant. However, it
(Peters and Hertwich, 2008). While this does not explicitly add is important to realise that consumption-based inventories
a trade-measure open to dispute in the WTO, it does reduce or provide considerable insight into climate policy and mitigation.
eliminate many of the underlying concerns of competitive- In this sense, it is invaluable to use consumption-based NEI at
ness and participation (Peters and Hertwich, in press). least as a “shadow” indicator to help analyse and inform post-
Trade-measures may not necessarily involve controversial 2012 climate policy. With further methodological, data, and
issues, but rather aim to reduce conflicts between trade and political developments consumption-based NEI can take an
climate policy. WTO approved trade barriers often conflict with increasing role in future climate policy.
overarching environmental objectives. For instance, the EU
places a customs duty on bio-ethanol, equal duties on electric
and petrol cars, and until recently imposed an antidumping 5. Conclusion
duty on imports of energy-saving integrated compact-fluores-
cent lamps from China (Bang et al., in press). In these
There are several different system boundaries that can be
examples, it is clear that harmonizing trade and climate policy
used when constructing NEI. Depending on the system
could achieve significant environmental goals. The consump-
boundary, the assigned emissions and hence mitigation
tion-based NEI are not used as a tool to identify conflicts
possibilities are different. Arguably there is no “optimal”
between trade and climate policy, and identify how to
method of allocation, as the different system boundaries
prioritize trade policy to additionally meet environmental
often provide different information. The production-based NEI
objectives.
used by the UNFCCC has been critiqued by many authors for
The aim of the Clean Development Mechanism (CDM) is to
not including the emissions embodied in imports. Changing
allow Annex I countries to invest in projects that reduce GHG
the system boundary to consider imports, but not exports, is
emissions in non-Annex I countries. The underlying rationale
the foundation of consumption-based NEI. In this article, three
is that mitigation may be more cost-effective in non-Annex I
open issues in the construction of consumption-based NEI
countries. The CDM has been criticised from many angles, but
were discussed. First, it was shown that there are two distinct,
mainly since it does not produce systemic changes in the
but valid, methodologies for constructing consumption-based
energy systems of non-Annex I countries (Wara, 2007). The
inventories. The EEBT model considers bilateral trade and is
CDM concept is a natural part of a consumption-based NEI,
more applicable to NEI. While the MRIO model is analogous to
since the inventory identifies which sectors and countries
LCA and is more applicable to consumption studies. Second, a
contribute most to national emissions. For example, Peters
consistent method of weighting production-based and con-
and Hertwich (2006b) identified electricity production in
sumption-based NEI together was presented which builds on
developing countries as the most critical sector in Norway's
the existing shared-responsibility literature. Third, several
consumption-based NEI. In this way, consumption-based NEI
ways of implementing consumption-based NEI were dis-
can be used to identify and prioritize mitigation activities
cussed. While desirable from an environmental perspective,
under the CDM. Project sponsors can then choose from a list of
consumption-based NEI face several implementation obsta-
identified projects. Since a CDM activity in a trade partner will
cles due to their wide system boundary. Consumption-based
reduce emissions for many importing countries, it is neces-
NEI can be used in conjunction with other indicators to help
sary to allocate the CDM reductions to the sponsor country.
differentiate reduction commitments, prioritize mitigation
There is the option of using only a consumption-based NEI
policies, and harmonize trade and climate policy.
instead of a production-based NEI. This option may have
better environmental integrity, but arguably shifts from one
extreme to another. Given the wide system boundaries and
Acknowledgements
increased uncertainty of consumption-based NEI it may be
difficult to implement them as the unique indicator in post-
I would like to acknowledge Christopher Weber and Thomas
Kyoto climate policy. There is the option of weighting
Wiedmann for their invaluable comments.
production-based and consumption-based NEI together, but
this reduces the available information as two indicators are
combined into one. However, it is clear that consumption-
Appendix
based NEI add valuable information and should contribute in
some form to post-Kyoto debates.
A key challenge of the MRIO model is to split ers into the
desired components. This is straight-forward using the IOT for
imports, which has the balance
10
X
Although, due to aggregation error, MRIOA might not provide mr ¼ esr ¼ Zr;imp e þ yr;imp ð37Þ
the necessary detail to calculate BTA (Ismer and Neuhoff, 2004). s
22 E CO L O G I CA L E CO N O MI CS 65 ( 20 0 8 ) 1 3–2 3
where Zr,imp = ∑sZsr represents the collected (or estimated) import
matrix, yr,imp = ∑sysr, and e is a summation vector. Using this
balance in the import IOT, ers can then be distributed to produce,
esr
r;imp
Zsr
ij ¼ Zij
i
ð38Þ
mri
that is, the imported IO data is distributed according to the trade
share from each region. Similarly for final demand,
r;imp esr
ysr
ij ¼ yij
i
ð39Þ
mri
where the j here can represent different categories of final
demand (households, government, etc).
Essentially the method distributes the structure of the IOT
and distributes it to countries according to the structure of the
balanced bilateral trade data. A key difference with other MRIOT
balancing techniques is that the bilateral trade data is balanced
and not the MRIOT. Thus, the underlying IOT—which are
closer to the statistical sources—are not modified as in other
techniques (Oosterhaven and Stelder, 2007; Wiedmann et al.,
2007c). Of course, it is also a non-trivial task to balance bilateral
trade data (Dimaranan, 2006), but the philosophy here is to
retain the IOT in an unmodified form.
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