Addressing the Drivers of Carbon Emissions Embodied in Indian Exports: An Index Decomposition Analysis

AuthorSuvajit Banerjee
Publication Date01 November 2019
Date01 November 2019
Addressing the Drivers
of Carbon Emissions
Embodied in Indian
Exports: An Index
Decomposition Analysis
Suvajit Banerjee1
This study identifies the determinants that have an observable impact over the
change in carbon dioxide emissions embodied in the production of Indian exports
by adopting an index decomposition analysis to address the contribution from
four mutually non-exclusive factors which arise due to India’s increasing export
performance during the 1995–2009 period on the change in total emissions embod-
ied in exports. These four factors are scale effect, composition effect, emission
regulation effect and production efficiency effect. The idea of bringing the last
two effects is to capture the impact from technology factor due to international
trade. This study found an increased emission embodiment in exports of 234.24
mega-tonnes by using input–output modelling with ‘emissions embodied in bilateral
trade’ approach and then applies the Logarithmic Mean Divisia Index-I (LMDI-I)-
based additive and multiplicative formulae following Ang and Zhang (2000) and
Ang (2004) to conduct the decomposition exercise. This study finds the scale
effect as the largest contributing factor increasing the emission levels by more
than 184 per cent of the original increase, while the other three effects creating
dampening impact over this scale-driven increase. Emission regulation effects cre-
ated the maximum cleaning-up impact, especially during the 2002–2009 phase.
JEL Codes: C67, F64, Q43, Q48, Q56
Emission embodied in export, Index decomposition analysis, scale effect, composition
effect, emission regulation effect, production efficiency effect
1 Department of Economics and Politics, Vidya Bhavana, Visva Bharati University, Santiniketan, West
Bengal, India.
Corresponding author:
Suvajit Banerjee, Department of Economics and Politics, Vidya Bhavana, Visva Bharati University, PO:
Santiniketan, West Bengal 731236, India.
Foreign Trade Review
54(4) 300–333, 2019
© 2019 Indian Institute of
Foreign Trade
Reprints and permissions:
DOI: 10.1177/0015732519874208
Banerjee 301
The annual average growth rate of real gross domestic product of India
remained stagnated at around 3.5 per cent during 1950–1980, and that in per
capita terms was 1.3 per cent only, euphemistically which was termed as the
‘Hindu growth rate’. In the 1980s, India’s GDP growth score abled to stay
above this average but again slipped to 1.5 per cent only during 1990–1993.
During this time, India adopted the liberalization, privatization and globaliza-
tion (LPG) policy and become a founder member of the World Trade
Organization (WTO) in 1995. From then on, India mostly experienced a steady,
steep and stable growth rate in its GDP until the global economic slowdown
during 2008–2009. With this India also witnessed a decent level of industriali-
zation and accelerated export growth rate. Although service sector has been the
principal pace generator of this export growth, merchandise trade also contrib-
uted substantially. During the 1995–2014 period, the contribution of merchan-
dise exports to India’s GDP increased from 8.6 per cent to 15.8 per cent and
during the same time, the real value of merchandise exports increased by
almost seven times (World Development Indicators, World Bank). On the other
hand, this increasing GDP and exports caused the fossil-fuel based energy con-
sumption to be almost tripled, and as a consequence, the territorial carbon
dioxide (CO2) emissions gathered a tremendous momentum during this post-
reform regime with an annual average growth rate as high as 8.8 per cent dur-
ing 1995–2014, and this turned India as the third largest CO2 emitter in the
world just after China and the USA with its 6 per cent contribution to 2015
global emissions (World Energy Outlook, 2015; World Development Indicator).
In spite of this growing evidence of increased trade, in one hand, and the
increased emissions, on the other, still the question is largely unresolved of
whether there is any missing link between this accelerated exports and galloping
emission tendency in case of India. In this article, this trade-environment nexus
is readdressed via three principal channels, namely—the scale effect, the compo-
sition effect and the technique effect which together constitutes the impact of
international trade upon environmental pollution. Trade increases the scale of
economic activities which essentially increases pollution, hence the scale factor;
trade generally alters the production structure of the entire economy, may be by
specializing towards comparatively advantageous sectors, hence the composi-
tion factor and trade brings in new technological uses, either through the intro-
duction of more stringent environmental regulations or from the cultivation of
new knowledge and innovation and technology transfer from foreign countries,
which might help to better handle the natural resources, hence the technology
effect. On the context of environmental consequences of free trade, Grossman
and Krueger (1991) in their pioneering empirical research discussed the role of
interactions among these three mutually non-exclusive factors that ultimately
found to determine the ‘SO2’ and ‘smoke’ concentrations in Mexico after its join-
ing in the North American Free Trade Agreement (NAFTA). The argument of
‘pollution haven hypothesis’1 in the trade-environment literature is also princi-
pally enrooted in the interactions of these scale, composition and technique
302 Foreign Trade Review 54(4)
effects (Chichilnisky, 1994; Antweiler, Copeland, & Taylor, 2001; Michida &
Nishikimi, 2007; Cherniwchan, Copeland, & Taylor, 2016; Copeland & Taylor,
1994, 1995, 1999, 2004). Now CO2 being the most important greenhouse gas
(GHG) affecting the global climatic situation, international politics and diplo-
macy frequently inviting these carbon emission issues in bilateral to multilateral
trade and economic negotiations and embarrassing country leaders and trade
policy expert groups from both developed and developing countries. Therefore,
from a policy formulation perspective as well, there is a need to investigate the
factors which ultimately determine the level of CO2 pollution and the change in
these levels.
The article is organized as follows: The second section briefly explains the
conceptual backdrop behind the calculation of decomposition, the third section
analyses the methodological and data collection issues, and the fourth section
elaborates the result. Finally, the fifth section concludes the article.
Literature Review
This article explores the importance of the factors which cause an observed change
in the CO2 emissions embodied in the production of exports by adopting a decom-
position analysis. Within this ‘decomposition analysis’, there are two distinct
approaches in the literature2—structural decomposition analysis (SDA) and index
decomposition analysis3 (IDA). Considering the constraints as far as the data avail-
ability is concerned, this study chooses IDA which is one of the most accepted
methods in the entire decomposition literature (Ang, 2004; Ang & Pandiyan, 1997;
Ang & Zhang, 2000; Bhattacharyya & Ussanarassamee, 2004; Davis, Sanstad, &
Koomey, 2002). In recent times also, IDA has been extensively applied, especially
in the analysis of energy and environment related research questions (Andreoni &
Gulmarini, 2016; Mahony, 2013; Moutinho, Moreira, & Silva, 2015; Rustemoglu
& Andres, 2016; Shahiduzzaman et al., 2015; Yao, Feng, & Hubacek, 2013). In
trade-environment literature, the use of this analytical approach is also very popu-
lar (Grether, Methys, & de Melo, 2007; He, 2010; Lise, 2005; Liu et al., 2017).
This concept of index decomposition is also applied in a number studies with an
Indian perspective (Das & Paul, 2014; Mukherjee, 2008; Paul & Bhattacharyya,
2004). However, decomposition analysis in any form under trade and environment
context with an Indian scenario is found completely unexplored in the literature.
Therefore, the contribution of this study lies in identifying the drivers of the change
in carbon emission content of Indian exports over time during the post-reform high
growth regime by applying an index decomposition.
Conceptual Backdrop
This study is inspired by the decomposition previously shown in the research of
Birdsall and Wheeler (1992). According to their approach, industrial pollution can

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