Anniversary Fund of the Austrian National Bank

Brief description of the project: “Does a value-added smile curve imply an environmental frown curve?”
This project aims at understanding the complex and dynamic relationship between value added and emission contributions of individual industries in global value chains (GVCs) in the last 25 years. Specifically, we explore the interactions between the incorporated value added and the embodied CO₂ emissions along different stages of the value chain by estimating ‘smile curves’ for both value added and CO₂ emissions. Comparing the change in the functional form of these curves over time, we investigate which activities have been offshored to emerging economies over the past decades. In particular, following the literature on the pollution haven hypothesis and carbon leakage, we want to test whether activities with a high CO₂ emission-intensity but low value-added content have been offshored to a larger extent. This study has important policy implications in terms of combatting climate change, especially with respect to the role of environmental regulation and its effects.

The project poses the following primary research questions:

1. Is outsourcing of less value-added (and labour cost) intensive production steps accompanied by outsourcing emission-intensive production steps?
2. At which stages of a certain value chain is CO₂ emitted, and how does this relate to the creation of value added?
3. How do patterns of value-added creation and CO₂ emissions along value chains vary across countries and sectors?
4. How did patterns of value-added creation and CO₂ emissions along value chains evolve over the past decades? How does the comparison between value added and CO2 emissions enhance our understanding of the pollution haven hypothesis and carbon leakage?

Research objective:
We explore the relationship and interaction between value added and CO₂ emissions in global value chains over the past three decades under the smile curve hypothesis. We extend the original framework of plotting value added across production stages by incorporating CO₂ emission intensities as a further dimension. Moreover, we plan to investigate the pollution haven hypothesis and carbon leakage effects with this data, exploiting changes in environmental regulation and free trade agreements. Overall, this project will help to better understand the complex interactions in GVCs between value added contributions and greenhouse gas emissions. We plan to publish the dataset in an easily accessible form, hoping to foster future research in this area, and provide a visualization tool for policy makers and the public. We hope this research eventually makes a small contribution in helping to combat climate change while preserving the economic benefits of globalization.

The project is supported by the Anniversary Fund of the Austrian National Bank. Further information can be found here.