Measuring emissions avoided by international trade: Accounting for price differences

- I-O uses the domestic technology assumption to estimate emissions avoided by trade.
- Standard DTA ignores price differences between domestic produced and imported goods.
- We propose a new physical DTA that takes into account price differences.
- We compare both methods by applying them to GHG emissions in Spain 1995-2007.
- Standard DTA underestimates emissions avoided by trade.

Net Emissions Avoided by trade (NEA) are the difference between the pollution that would have been produced in a country if it had not exported any products and all the imports required to satisfy its domestic demand had been produced internally, and its actual emissions. The Domestic Technology Assumption (DTA) applied to an Input-Output model is the appropriate method to estimate the NEA. The usual implementation of the DTA involves that the country analyzed should produce a quantity of products equivalent to the monetary value of the imports required to satisfy its final demand (i.e. 'monetary DTA'). However, due to price differences, the same physical quantity of goods in different countries could have a different monetary value and the estimation of the NEA would be biased. We show that a 'physical DTA', focused on the pollution to produce domestically the imports measured in physical units, would be a better approach. We have applied both methodologies to analyze greenhouse gas emissions in Spain 1995-2007. Both methodologies show that Spain is avoiding emissions through trade. However, the NEA increases up to three times when applying the 'physical DTA', showing that results from the 'monetary DTA' are biased by price differences.