Financial Crisis, Virtual Carbon in Global Value Chains, and the Importance of Linkage Effects. The Spain-China Case

Trade has a disproportionate environmental impact, while the international fragmentation of production promotes different patterns of intermediate inputs and final goods. Therefore, we split up the balance of domestic embodied emissions in trade (BDEET) to assess it. We find that Spain has a significant emissions deficit with China between 2005 and 2011. The Global Financial Crisis of 2008 reduced Spanish imports of pollution-intensive inputs from China and slightly improved the BDEET. China primarily exports indirect virtual carbon, representing 86% of the total, especially from Production of electricity, gas, and water sector. These linkages effects in China indicate that post-Kyoto agreements must focus not only on traded goods but also on the environmental efficiency of all domestic production chains. The methodology proposed allows us to identify the agents responsible for this trade in both Spain and China, namely the sectors importing intermediate inputs (Construction and Transport equipment) and industries and consumers importing final goods (Textiles, Other manufactures, Computers, and Machinery). The relevant sectors uncertainties found when we compare the results for BDEET and emissions embodied in bilateral trade (BEET) lead us to recommend the former methodology to evaluate the implications of environmental and energy policy for different industries and agents.