In previous research, RFF scholars introduced the Greenhouse Gas Index as a tool to help ensure that nations can remain competitive in international trade even in the presence of a tax on greenhouse gases. Now, new research suggests that the Greenhouse Gas Index also could help standardize the quantification of emissions for a wide variety of policies.
A growing number of policies and initiatives—public, private, domestic, and international—require a standard procedure to quantify the amount of greenhouse gas (GHG) emissions associated with specific manufactured products. Policies such as GHG border tax adjustments (import charges and export rebates) for internationally traded products and national and local procurement policies would require such a standard procedure.
In earlier work, my colleagues and I originally conceived the greenhouse gas index (GGI) as a tool that can standardize the emissions associated with specific manufactured products, based on the properties of the products themselves and the processes and materials used to create those products. The GGI could help to determine border tax adjustments that are compatible with the rules of the World Trade Organization in the context of a hypothetical US tax on GHG emissions. Such a border adjustment would impose charges on covered imported products and provide export rebates for covered domestic products. Now, we propose that not only can the GGI apply to border tax adjustments, but also that the concept can be adapted readily for a variety of policies and initiatives, which I describe below.
In our latest report, Resources for the Future Senior Advisor Jan Mares and I describe how to estimate the GGI values for GHG-intensive products in 39 major industrial sectors based on publicly available information. The first 10 modules in this new work address two key groups: first, sectors that produce coal, crude oil, natural gas, petroleum fuels, and electricity; and second, five other sectors that are likely to be included in the European Union’s carbon border adjustment mechanism. Additional modules in the new study include many of the “energy-intensive, trade-exposed” industries identified in the United States during consideration of the Waxman-Markey cap-and-trade legislation over a decade ago. Our new work on GGI values for specific products in these sectors will help guide industries and regulators around the world in determining and assigning GHG emissions to specific products.
The GGI estimates in our new, industry-specific modules use public information for key factors that contribute to GGI values (e.g., GHG emissions from electricity derived from coal, natural gas, and fuel oil). We refer to these estimates as “indicative, representative” GGI values because the estimates for a representative set of products typically rely on national or sectoral averages for emissions from electricity and fuels and other factors—rather than on detailed information from specific facilities, as would be required in practice under the GGI determination process.
Border Adjustments without a Greenhouse Gas Tax
In the framework we originally proposed in 2018, colleagues Jennifer Hillman, Matt Porterfield, Jan Mares, and I describe how the GGI could be used to create border tax adjustments that would be compatible with existing rules under the World Trade Organization. As we’ve defined it in the framework, a product’s GGI (expressed as metric tonnes of carbon dioxide [CO₂] equivalent per tonne of product) multiplied by the GHG tax rate (US$ per tonne of CO₂) determines the value of its border tax adjustment (US$ per tonne of product).
Our new report explains how the GGI values could help determine border adjustments for GHG-mitigation policies that are not based on an explicit GHG tax. Such policies face a major challenge in identifying and using an objective procedure to determine an effective GHG price for covered products. Furthermore, even in the context of a given effective price, these GHG-mitigation policies require a method or metric to apply the effective price to specific products; the product’s GGI could serve as this metric.
The border adjustment for a product again would be its GGI, now multiplied by the effective price of the product. Depending on the design of a given policy, the GGI calculation might require modification. Nevertheless, the concept remains universally applicable.
Determining the Greenhouse Gas Index in Detail
The process of determining the GGI applies in the same fashion to covered products in all sectors. The manager of a specific facility or operation (e.g., a steel mill or coal mine) would be responsible for determining the GGI of covered products. This determination involves two major steps. The first is to determine the total GHG emissions contributed by all sources along a manufacturer’s production and supply chains (measured in tonnes of CO₂ equivalent). The second is to allocate this total value among all the products created at the specific facility.
This approach substantially implements the requirements for quantifying the carbon footprint of products, as laid out by the International Organization for Standardization—in particular, the technical requirements for determining GHG emissions from facilities and allocating those emissions to specific products.
As we describe in our new report, the GGI incorporates contributions from the following three sources at the facility level: the carbon content in produced fossil resources (e.g., coal, oil, and natural gas); GHG process emissions (if any) that arise in the production of fossil resources or when manufacturing other GHG-intensive products; and the supply chain, in terms of GHG-intensive products from suppliers that are purchased by the manufacturer.
The contribution from the carbon content of produced fossil resources is expressed as tonnes of CO₂ per tonne of product, under the assumption that 100 percent of the carbon ultimately will be emitted as CO₂. GHG process emissions occur, for example, when cement is produced through the calcination of limestone, and in the production of fossil resources from venting, flaring, and leakage of GHGs. Major contributions from the manufacturer’s supply chain occur from purchases of electricity, fuels that produce thermal energy, and GHG-intensive feedstocks and materials (e.g., natural gas, petrochemicals, pulp, and raw steel).
For compatibility with World Trade Organization rules, the GGI determines the contributions of emissions from the manufacturer and supply chain in a way that’s similar to how value-added taxes are determined. The procedure follows the cumulative buildup of GGI values as GHG-intensive products are purchased, utilized, and transformed by the manufacturer to produce new, GHG-intensive products.
Unlike the standards proposed by the International Organization for Standardization, the GGI does not expressly use the concept of Scope 1, 2, and 3 emissions. These emissions often are characterized as resulting from activities of the manufacturer (Scope 1), its suppliers (Scope 2), and emissions occurring outside the control of the manufacturer (Scope 3). We avoid the concept because the emissions often are defined in different ways by different organizations—especially Scope 3. For the most part, Scope 3 emissions are beyond the ability of a manufacturer to control or determine. Also, the GGI does not incorporate life-cycle analyses, both because aspects such as land use are extremely difficult to evaluate and because many aspects of life-cycle analyses are beyond the knowledge or ability of a manufacturer to determine or control (as with Scope 3 emissions).
Nonetheless, the GGI incorporates all aspects of Scope 1 and 2 emissions, plus the emissions that result from the combustion or decay of products that are derived from fossil resources (which would be considered Scope 3 emissions for their producers). Hence, the GGI can be described as a cradle-to-gate assessment plus 100 percent of the carbon in products derived from fossil resources.
Allocation of Emissions to Products
To allocate a facility’s emissions among the products that the facility creates, the GGI uses two approaches: allocation by carbon content and allocation by weight. For examples of allocation by carbon content (which applies to produced fossil resources such as coal, oil, and gas, and products derived from them) see the modules in our report for coal, refined petroleum products, and petrochemicals. This approach first determines a facility’s overall average amount of covered emissions per tonne of carbon for all the products it manufactures, and then multiplies that average by the amount of carbon in each covered product (fraction by weight).
For examples of allocation by weight (which applies to inorganic products) see the modules in our report for steel, aluminum, and cement. This approach proceeds in a similar fashion as above, by first determining a facility’s average amount of covered emissions per tonne of its core product, and then multiplies that average by the amount of core product in each product (fraction by weight).
For decades, manufacturers have accumulated experience in determining and reporting greenhouse gas emissions from their facilities. Going forward, the challenge now is to move beyond facilities to determine the emissions associated with the products that those facilities create.Brian P. Flannery
Allocation of emissions among specific products becomes a matter of accounting that involves known or knowable information, much of which is publicly available already. The balance of information that remains unavailable publicly is known by the manufacturer or is obtainable from its suppliers of feedstocks, other raw materials, fuels, or electricity. In a previous report, we describe in detail how to determine the GGI for products of specific facilities. Note that the framework we’ve proposed would obligate suppliers to communicate to their customers the GGI values of the covered products they sell.
Application to Policies Beyond a Greenhouse Gas Tax
Critically, the factors that determine the GGI are not dependent on any specific policy design. We initially conceived the GGI in the context of a hypothetical US GHG tax, but the GGI itself depends only on physical processes and the composition of GHG-intensive products. The GGI therefore can help develop border adjustments under various GHG-mitigation policies, including the Clean Competition Act recently introduced in the US Senate or the EU carbon border adjustment mechanism.
In cases that do not involve a GHG tax, the GGI may need to be modified so that it incorporates only those emissions specified by a particular policy or initiative. This type of modification would be straightforward. Because the approach of our framework includes all major emissions sources, adjustment typically would simply require the exclusion or modification of appropriate components as necessary.
Other potential applications for the GGI could involve the design of green procurement policies or private-sector reports, strategic planning, and research and development. If all users adhere to a common metric such as the GGI, the benefits of these types of applications will be strengthened.
Potential Implications of Border Adjustments and the Greenhouse Gas Index
Developing countries have voiced serious concerns that ambitious climate policies in other nations may negatively impact their priorities of poverty alleviation, economic development, and international trade. These concerns with regard to international trade focus not only on border adjustments as the basis for import charges and export rebates, but also on the use of standards that might create technical barriers to trade if not properly designed and implemented. Because the GGI is based on international standards and explicit criteria, the use of the GGI as a common metric could alleviate some of those concerns, especially in the context of determining the GHG emissions associated with specific products.
The discussion above highlights some important benefits of applying the GGI in terms of maintaining competitiveness in international trade and for determining the emissions associated with products in other applications, such as clean-manufacturing initiatives. The GGI comprehensively and explicitly encompasses GHG emissions from cradle to gate, in addition to the CO₂ emissions from the ultimate use or decay of produced fossil resources; applies consistently to products in all sectors; can be tailored to diverse policies; and incorporates information that is known or knowable, much of which is publicly available today.
The estimates in our new report show the wide range of GGI values associated with identical products that are manufactured in a given sector using different raw materials, processes, and energy sources. Differences arise both for domestic production (even for operations in the same firm) and for imported products. We also note that products from different sectors that have widely varying GGI values often compete with one another (e.g., producing auto parts from steel, aluminum, or plastics). Such information will be essential when considering the impacts of GHG-mitigation policies and border adjustments, especially for impacts on competition (domestic and international) and supply chains.
Over two decades ago, firms in many GHG-intensive sectors worked together and with stakeholders to develop international, industry-endorsed, voluntary guidelines to determine and publicly report GHG emissions from their facilities (e.g., the GHG Protocol). Developing those guidelines required several years. The efforts resulted in agreed-upon, fit-for-purpose, reliable, and feasible procedures that have helped inform regulators around the globe as they have devised “official” systems to report and mitigate GHG emissions from facilities. These efforts have laid a firm foundation for similar voluntary public-private partnerships to coalesce and agree on approaches for assigning GHG emissions to products.
For decades, manufacturers have accumulated experience in determining and reporting GHG emissions from their facilities. Going forward, the challenge now is to move beyond facilities to determine the emissions associated with the products that those facilities create. Meeting this challenge will require putting into practice methods of determining the GHG emissions from facilities and supply chains, and allocating total emissions among the specific products that each facility creates. Successfully addressing these challenges may be an easier next step relative to previous efforts because, as our reports demonstrate, the information required is known or knowable to manufacturers and publicly available in many nations today.