Conference Agenda

International trade allows firms to outsource emissions through global supply chains, raising

the question of whether exporters – the firms driving globalization – are truly cleaner than

domestic producers. We show they are not: once emissions embodied in sourced inputs are

included, the conventional exporter’s environmental premium reverses, challenging the view

that trade reallocates activity toward cleaner firms. Using administrative firm-level data

and customs records for German manufacturers combined with fuel- and product-specific

emission factors, we construct carbon footprints that include both direct production-related

emissions and those embodied in domestic and international supply chains. Four stylized

facts emerge: (i) embodied emissions account for more than two-thirds of firms’ total emis-

sions; (ii) exporters’ production involves disproportionately more of such emissions, partic-

ularly via international sourcing; (iii) exporters appear cleaner in production but dirtier in

total; and (iv) at the intensive margin, export-demand increases lower production-related

but not total emission intensity, consistent with substitution from energy toward interme-

diate inputs. A heterogeneous-firm sourcing model rationalizes this empirical evidence by

highlighting the joint role of importing and exporting on firms’ emissions footprints. Our

findings highlight the importance to account for embodied emissions when evaluating the

environmental consequences of trade liberalization and designing climate policy

This paper develops a Melitz-style model of asymmetric countries to analyze the optimal environmental policy response when facing a trading partner’s Border Carbon Adjustment (BCA). By examining how a unilateral increase in emissions taxes affects endogenous productivity cut-offs, we show that a BCA reduces the relative welfare costs of raising domestic carbon prices. The mechanism operates through a reversal of the policy’s effect on the partner’s export threshold, which expands imported consumption. Calibrating the model with Indian firm-level data on emissions, productivity, market structure and export performance, we quantify the magnitude of these welfare effects for India when aligning its carbon price with that of the European Union. Structural asymmetries, such as lower productivity in the BCA-affected country, reduce its incentives to raise carbon prices, while firm heterogeneity further amplifies the welfare costs of higher carbon taxes and dampens the welfare smoothing potential provided by a trading partner’s BCA.

This paper examines carbon leakage across sectors and countries through international trade under unilateral carbon pricing. Building on Bernard et al. (2007), we incorporate the emissions generation into the general equilibrium framework that captures the interaction among country, sector, and firm-level characteristics to analyze changes in emissions across sectors and countries. The findings indicate that carbon pricing induces positive leakage across sectors—toward unregulated activities at home—and across countries—toward foreign producers. Anti-leakage measures can lessen, and sometimes reverse, cross-country leakage, but cross-sector leakage persists because inputs reallocate between sectors. A firm-level decomposition shows that reductions in firm-level emission intensity drive most of the decline in emissions within regulated sectors, while the mechanisms in unregulated sectors are mixed. Policy effectiveness depends on carbon market size and the competitiveness of regulated sectors, and welfare outcomes hinge on both the design of anti-leakage measures and the assumed social cost of carbon.

Regulation (EU)~2024/1787 extends methane regulation to fossil energy imports by conditioning EU market access on upstream methane performance. We quantify the emissions and welfare implications of such an import filter in a partial-equilibrium model of global oil trade with heterogeneous upstream methane intensity, abatement costs, and rerouting frictions. Sweeping the cutoff reveals an interior optimum: a threshold around 12~kg~CO2eq/bbl substantially lowers the methane intensity of EU imports (from 14.85 to about 10.76~kg~CO2eq/bbl) while delivering only modest reductions in global methane emissions (from 81.0 to about 78.0 Mt CH4/yr), reflecting adjustment primarily through trade reallocation rather than broad upstream mitigation.