Greening global value chains: Emerging countries’ upstream industries
Green industrial structure (Image: Parsoa Khorsand via Unsplash).

Greening global value chains: Emerging countries’ upstream industries

Accelerating the decarbonization of energy-intensive industries in emerging economies is crucial for achieving global net-zero emissions targets.

By Finn Ole Semrau

The majority of emission growth occurs in emerging and developing countries.1 While China is the largest global emitter, India follows in its footsteps. Its absolute emissions more than doubled and its share of global emissions has increased from 3.84 per cent in 2000 up to 7.3 per cent in 2021 (see figure below).2 India is facing the twin challenges of reducing poverty while also mitigating environmental degradation. Although India’s per capita emissions are still significantly lower than those of major polluters, it is crucial for India to decouple economic growth from environmental degradation to prevent a global environmental disaster. To this end, global policymakers must understand the driving forces behind firms’ CO2 emissions in emerging countries. 

Annual CO2 emissions from fossil fuels by world region, 1750 - 2021

Source: Our World in Data, 2021.

Technology diffusion along global value chains and climate goals until 2030

Firms don’t need to be first movers to achieve significant emission reductions. While breakthroughs in green innovations are crucial for reaching net zero, technologies needed to meet climate goals by 2030 already exist.3 What is needed, therefore, is diffusion and adoption, rather than (or, as well as) invention. Global value chain (GVC) participation can help firms to adopt new technologies. Exporting and foreign investments enable firms to scale up production, to benefit from international knowledge flows and to access green management practices.4 Furthermore, firms serving international markets face foreign competition, regulations, standards and stakeholders’ demands for clean production. The result is that firms embedded in global GVCs face stronger incentives to adopt clean technologies compared to those serving domestic markets only.5

Average upstreamness and CO2 emission intensity of Indian firms

Note: Firms’ upstreamness is measured by following Herkenhoff et al. (2021) and Antràs et al. (2012). A higher value indicates further distance to final consumption.

Source: Author.

Upstream industries need to decarbonize

A firm’s position within the GVC is a strong determinant of production emissions. Industries positioned upstream in the value chain are significantly more CO2 intensive.6 7 This relationship between distance to final consumption and CO2 emissions is observable across countries around the world, and is also clearly seen in India’s economy. Indian firm-level data shows that the five most upstream manufacturing industries (closest to raw material extraction) emit an average of 4.34 kg CO2 per US dollar of value added, while the five most downstream industries (closest to final consumption) emit an average of 1.37 kg CO2 (see figure above). However, this descriptive statistic does not capture the substantial differences between firms in terms of size, internationalization, productivity, product scope or other characteristics. When controlling for firm characteristics, very upstream firms emit 82 per cent more CO2 per unit of value added compared with very downstream firms (see next figure).8

Achieving decarbonization in these sectors is a global objective. Green hydrogen is a contender for decarbonizing energy-intensive upstream industries, for instance by replacing fossil fuels-based blast furnaces in steel production. However, its availability is currently very limited, and its adoption is more likely to begin in industrialized countries.

Estimated CO2 emissions per unit of value added along the value chain in the Indian manufacturing sector

Source: Author.

Can GVC participation help upstream firms transition to cleaner production?

The adoption of existing production techniques can lead to significant emission reductions in upstream industries. GVC participation is a driver of more CO2-efficient production in the Indian economy.9 GVC participation is especially important for assisting firms to adopt cleaner production techniques if they produce further away from the global technology frontier10 - such as observable for Indian firms in upstream positions. Although dirty upstream producers exhibit a strong potential for technological upgrades, it is not observable that upstream firms will deliver a greater environmental benefit from serving foreign markets when compared to downstream firms. But this does not consider the idiosyncrasies of the countries a firm is exporting to. When accounting for the direction of trade, it can be seen that upstream industries that export to markets with stringent environmental regulations are less CO2 intensive. Firms in these industries respond to the environmental demands of intermediates in the GVC, but also embrace clean technologies in order to compete in global markets.11

The adoption of production techniques already in use elsewhere can lead to significant emission reductions in upstream industries. GVC participation can therefore be a driver of more CO2-efficient production in the Indian economy.12 GVC participation is especially important for helping firms further away from the global technology frontier.13 Although there is great potential for dirty upstream producers to clean up their production through technological upgrades, this will only be relevant for firms serving foreign markets with stringent environmental regulations. Indeed, upstream firms exporting to such markets are less emissions-intensive. Firms in these industries respond to the environmental demands of intermediates in the GVC, but also embrace clean technologies to compete in global markets.14

Policymakers need to consider the role of dirty upstream production

The relationship between dirty production and GVC position, as well as the importance of the direction trade, also has implications for policymakers. First, governments should aim to create a level playing field for firms by eliminating tariff escalation – the fact that more processed goods face higher tariffs. Hence, the trading system serves as an implicit subsidy worth several hundred billion dollars for environmentally harmful practices in upstream value chain positions.15 Although governments seek to protect local upstream industries, such distortions must be addressed in international trade negotiations to ensure the achievement of global climate goals.16

Second, the international community should support technology transfer to emerging economies. Integrating emerging and developing countries into GVCs effectively accelerates the diffusion of clean technologies, enabling these nations to contribute to emissions reduction efforts.

Third, the transmission of environmental standards and regulation through the value chain can assist firms to adopt clean technologies. Environmental, Social and Governance (ESG) measures in importing countries – transparency around embodied carbon in intermediate products, for example – could increase the pressure to adopt CO2-efficient technologies in exporting countries.

Finally, stringent environmental regulation remains a driver of clean production in emerging and developing countries, which are most vulnerable to the threats of climate change, and which have the greatest potential for decarbonization. Ambitious climate policy is therefore essential.

  • Finn Ole Semrau is researcher at the Kiel Institute for the World Economy.

Disclaimer: The views expressed in this article are those of the authors based on their experience and on prior research and do not necessarily reflect the views of UNIDO (read more).

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