Key takeaways

The global industrial sector is responsible for about a quarter of carbon emissions worldwide. About 22 per cent of these emissions are ‘embedded’ in globally-traded goods and services. Embedded emissions are generated anywhere along the supply chain of the product from production to transportation, so they include everything from the extraction of raw materials, the manufacturing process, and the final delivery to the customer.

As the world transitions to net zero, governments around the world are rapidly introducing policies targeting emissions embodied in these traded products.

To support these policies, governments are investing in the development of public embedded emissions accounting frameworks, known as EEFs. The Australian Government’s ‘Guarantee of Origin’ scheme is a world-leading example.

While EEFs have enormous potential to support the transition to a net-zero global economy, they equally have the potential to inhibit trade, slow the transition, and have a disproportionate impact on developing countries – both through their design, and through potential incompatibilities between accounting developed in different jurisdictions.

But ANU research points to a set of principles for EEFs to be compatible with both international trade law and climate change mitigation regimes.

Researchers systematically reviewed academic literature on trade law and carbon accounting to identify eight principles for policymakers working on embedded emissions accounting:

Accuracy: True embedded emissions should neither be under-estimated nor over-estimated.

Conservativeness: The reported reduction of emissions should not be over-estimated, or at least the risk of over-estimation should be minimised.

Least restrictive means: Embedded emissions accounting systems should have the least trade restrictive impacts possible.

Monotonicity: A reporting entity should not be able to reduce their reported emissions while increasing total emissions. Not only is this principle important for the scheme’s integrity, but it is critical to achieving a trustworthy and credible scheme.

Non-discrimination: Non-discrimination is a core principle of the World Trade Organisation that requires that like products be treated alike, and in many cases this extends to environmental attributes of products. Embedded emissions accounting systems should not generate explicit or implicit advantage or disadvantage for like products, where ‘like’ includes true environmental impacts.

Relevance: Embedded emissions accounting systems should be designed to support the needs of the intended uses and users.

Subsidiarity: What can be done as well or better at a lower level should be done at the lower level of governance or control.

Transparency: There should be clear documentation that allows independent parties to understand how estimates are compiled and to determine whether this meets good practice requirements.

According to the evidence, these eight principles have the potential to underpin EEFs that are trustworthy, transparent, practical, consistent, and flexible.