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© 2022 International Monetary Fund

WP/22/86

IMF Working Paper

Statistics Department

Measuring Carbon Emissions of Foreign Direct Investment in Host Economies

Prepared by Maria Borga, Achille Pegoue, Gregory Max Henri Legoff, Alberto Sanchez Rodelgo, Dmitrii Entaltsev (International Monetary Fund), and Kenneth Egesa (Central Bank of Uganda)

Authorized for distribution by Carlos Sanchez Munoz

May 2022

ABSTRACT: This paper presents estimates of the carbon emissions of FDI from capital formation funded by FDI and the production of foreign-controlled firms. The carbon intensity of capital formation financed by FDI has trended down, driven by reductions in the carbon intensity of electricity generation. Carbon emissions from the operations of foreign-controlled firms are greater than those from their capital formation. High emission intensities were accompanied by high export intensities in mining, transport, and manufacturing. Home country policies to incentivize firms to meet strict emissions standards in both their domestic and foreign operations could be important to reducing emissions globally.

JEL Classification Numbers:	F21 International Investment; F23 Multinational Firms; F64 Economic Impacts of Globalization: Environment
Keywords:	Carbon emissions, foreign direct investment, input-output tables
Author’s E-Mail Address:	Mborga@imf.org; kegesa@bou.or.ug

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JEL Classification Numbers:	F21 International Investment; F23 Multinational Firms; F64 Economic Impacts of Globalization: Environment
Keywords:	Carbon emissions, foreign direct investment, input-output tables
Author’s E-Mail Address:	Mborga@imf.org; kegesa@bou.or.ug

Title Page

WORKING PAPERS

Measuring Carbon Emissions of Foreign Direct Investment in Host Economies

Prepared by Maria Borga, Achille Pegoue, Gregory Max Henri Legoff, Alberto Sanchez Rodelgo, Dmitrii Entaltsev, and Kenneth Egesa¹

Contents

• Glossary

• Executive Summary

• Introduction

• Methodology and Data Used

  • A. Estimating the Investment Effect of FDI on Carbon Emissions

  • B. Estimating the Effect of Ongoing Operations of Foreign Owned Enterprises on Carbon Emissions

  • C. Estimating the Emissions of MNEs and of Domestic Firms Embodied in Exports

  • D. Use of the ICIO of AMNEs

  • E. Data and Methodological Limitations

• Results

  • A. Carbon Emissions Associated with the Investment Impact of FDI

  • B. Carbon Emissions of Ongoing Operations of MNEs

  • C. Carbon Emissions in Exports of MNEs

• Conclusion and Policy Implications

• Annex I. Working Example on Computing Emission Estimates

• Annex II. Illustration on the Computation of the Output Multiplier

• References

• FIGURES

• 1. Structure of the ICIO Tables for Each Year

• 2. Carbon Emissions in GFCF of FDI and FDI Flows,20015–15

• 3. Top 4 Industries by Country of Carbon Emissions Related to GFCF of FDI (Tons per 1 Million US Dollars of Final Demand), 2005–15

• 4. Carbon Emissions in MNEs Output, 2005–15 Average

• 5. Carbon Intensities of Output (Tons per 1 Million USD), 2005–15 Average

• 6. Carbon Intensities of Output (Tons per 1 Million USD), 2005–15 Average

• 7. Trends in Carbon Intensities of MNEs Output (Tons per 1 Million USD), 2005–15 Average

• 8. MNE Carbon and Export Intensities, 2005–15 Average

• 9. Carbon Intensities and Shares of Export Emissions to Output Emissions, 2005–15 Average

• TABLES

• 1. Data Sources

Glossary

Executive Summary

This paper presents a statistical framework for estimating the carbon emissions associated with foreign direct investment (FDI) in host economies. There are two sets of estimates. The first measures carbon emissions from capital formation funded by FDI that is associated with, for example, the construction of new plant and equipment. The second set of estimates measures direct and indirect carbon emissions from the production of foreign-owned firms. The empirical evidence on the impact of FDI on carbon emissions in host economies is a first step in untangling the relationship between the offshoring of multinational enterprises (MNEs) and global carbon emissions. The framework is also used to develop comparable estimates of carbon emissions in the host economy from operations of non-FDI, or domestic owned, enterprises (DOEs). The methodology is underpinned by the OECD Inter Country Input Output (ICIO) tables linked to carbon emissions, FDI statistics by industry from the OECD, and the OECD Analytical Activity of Multinational Enterprises (AMNE) Database.

The empirical evidence shows that the carbon intensity of gross fixed capital formation (GFCF) financed by FDI has fallen over time, driven in most countries by reductions in the carbon intensity of the electricity, gas, and water industry. Carbon emissions from the ongoing operations of foreign-controlled firms (henceforth MNEs) are larger than those associated with their capital formation. At industry-level, manufacturing; transport and storage; and electricity, gas, and water had the highest overall emissions and emission intensities among MNEs. A comparison between MNEs and DOEs showed that DOEs accounted for the largest share in total emissions and generally had higher carbon intensities, but there were cases in low carbon intensive countries where MNEs had higher carbon intensities. For MNEs, high emissions intensities were accompanied by high export intensities in mining; transport and storage; and manufacturing industries.

Given the high carbon emission intensities of MNEs in high export intensity industries, home country policies that incentivize their domestic direct investors to meet high emissions standards in host economies could be an important tool in reducing global emissions. Addressing data limitations would improve the quality of the estimates, including by developing statistics that identify the FDI flows that are used to expand capacity in the host economy and that identify carbon emissions by MNEs. Finally, expanding country coverage would enable a more comprehensive analysis of the impact of offshoring of MNEs on global carbon emissions.