Endogenizing Capital in MRIO Models: The Implications for Consumption-Based Accounting.

Area of Science:

• Environmental Science
• Economics
• Climate Change Research

Background:

• Global greenhouse gas emissions are significantly linked to capital goods production.
• Current consumption-based emission calculations using multiregional input-output (MRIO) models do not fully account for emissions from capital goods.
• This omission leads to underestimation of the carbon footprint of final consumption and emissions embodied in trade.

Purpose of the Study:

• To address the underestimation of emissions by incorporating capital goods transactions into global input-output models.
• To re-evaluate consumption-based carbon footprints and emissions embodied in international trade.
• To improve the accuracy of environmental accounting methodologies.

Main Methods:

• Endogenizing capital transactions within the EXIOBASE global multiregional input-output database.
• Allocating emissions associated with capital goods production to the final goods and industries that use them.
• Comparing revised consumption-based emissions with traditional production-based accounting.

Main Results:

• Endogenizing capital substantially increased the carbon footprint of final consumption for many countries (up to 57%).
• The gap between production-based and consumption-based emissions widened for most nations.
• Global emissions embodied in trade increased by up to 11%, amplifying existing bilateral trade emission patterns.
• The carbon footprint of specific product categories saw a threefold increase.

Conclusions:

• The integration of capital goods into MRIO models is a critical improvement for accurate environmental accounting.
• Current consumption-based emission assessments significantly underestimate the impact of capital goods.
• This refined methodology provides a more comprehensive understanding of global carbon flows and trade impacts.