Firm-level CO2 emissions and production networks: evidence from administrative data in Chile

This paper was produced as part of the BIS Consultative Council for the Americas (CCA) research network and conference on "Macro-financial implications of climate change and environmental degradation", held in Bogotá on 2-3 December 2024.

Summary

Focus

This research examines how relationships between firms in Chile influence the broader economic effects of policies aimed at reducing carbon emissions, such as carbon taxes. Using detailed administrative data – including customs records and real-time transactions between firms – it first measures the direct carbon dioxide (CO2) emissions from fossil fuel use at the firm level and then maps how those emissions spread through the economy via supply chains. It compares traditional methods to construct input-output tables with a new approach using firm-level transaction data.

Contribution

The study offers two key advancements. First, it creates a real-time, detailed view of CO2 emissions by tracking fuel imports and how they flow through industries, providing policymakers with up-to-date insights far faster than official reports. Second, it introduces a novel way to analyse the ripple effects of emissions using firm-to-firm transaction data, which capture intricate supply chain connections. This granular approach helps to identify which sectors might face hidden costs from climate policies due to their position in the production network. The findings validate the new method against established techniques, enhancing confidence in its accuracy for future policy analysis.

Findings

Electricity generation, manufacturing, transport and mining account for 95% of Chile's direct CO2 emissions. However, indirect emissions – driven by supply chain links – reveal different patterns. For example, while electricity production directly emits the most CO2, its role as a supplier to other industries amplifies its impact, particularly on mining. Mining, though less directly emissions-intensive, is highly exposed to carbon taxes due to its reliance on electricity and other inputs. Exports and household consumption drive nearly 90% of total emissions, underscoring how global demand and local spending affect Chile's carbon footprint. These insights highlight the importance of considering both direct emissions and those linked to supply chains when designing policies to ensure a fair and effective green transition.

Abstract

This project uses unique Chilean administrative data to shed light on how production networks might play a key role in shaping the macroeconomic impacts of green transition policies. First, using customs and firm-to-firm transaction data that covers the universe of firms in Chile, we build the fossil fuel consumption and the direct CO2 emissions at the firm, sectoral, and aggregate levels. In line with the official national sources, the electricity generation sector is the most important contributor to aggregate CO2 emissions, followed by the manufacturing, transport, and mining sectors. Then, we study the role of input-output linkages in propagating CO2 emissions to the rest of the economy. To do so, we construct the production network and the carbon footprint at the firm level using firm-to-firm transaction data from the Chilean IRS, and we validate our results with the input-output tables approach used in the literature. The results show that the electricity generation sector is central in the network, with potentially important downstream spillover effects, while the mining sector is located in the outer part of the network with rich upstream connections. Also, we show that the copper mining industry is the most exposed one to a carbon tax scheme implemented on all the firms in the economy and also to one that only targets the electricity generation sector.

JEL classification: E01, D24, D57, E23, H23, Q54, Q56, Q58

Keywords: carbon emissions, production network, carbon footprint, downstream and upstream propagation, administrative firm-level data