Endogenizing Capital in MRIO Models: The Implications for Consumption-Based Accounting

Nearly 30% of global greenhouse gas emissions are associated with the production of capital goods. Consumption-based emission calculations based on multiregional input output (MRIO) models allocate emissions occurring in the production of intermediate goods to the final goods produced in an economy. Like intermediate goods, capital goods are used in production processes; yet the emissions associated with their production are not allocated to the industries using them. As a result, the carbon footprint of final consumption as well as emissions embodied in trade are currently underestimated. Here, we address this problem by endogenizing capital transactions in the EXIOBASE global MRIO database, thereby allocating emissions from capital goods to final consumption. We find that endogenizing capital substantially increases the carbon footprint of final consumption (by up to 57% for some countries), and that the gap between production-based and consumption-based emissions increases for most countries. We also find that the global emissions embodied in trade increase by up to 11%, and that current patterns of bilaterally traded emissions are amplified. Furthermore, endogenizing capital leads to a 3-fold increase in the carbon footprint of certain product categories. The results suggest that our approach constitutes an important improvement to current input output methodology.