Beyond production and consumption: using throughflows to untangle the virtual trade of externalities

Abstract

Understanding how countries contribute to the generation of externalities globally is important for designing sustainable policies aimed at reducing negative externalities such as carbon emissions. Commonly used approaches focus on either producers or consumers, thereby neglecting the role of intermediates. We here introduce the concept of throughflow to comprehensively quantify upstream externalities generated by the supply chains originating from, passing through or ending in a given country. We define the Throughflow Based Accounting (TBA) framework as the decomposition of the throughflow into local, imported, exported and traversing externalities. We illustrate the strength of the TBA by identifying the CO2 emissions caused by supply chains involving the German economy. We show that Germany could use its position in global value chains to help reduce two times more CO2 emissions than measured with usual production- or consumption-based accounting frameworks.