Tracking Global Factor Inputs, Factor Earnings, and Emissions Associated with Consumption in a World Modeling Framework

This paper presents a new approach for estimating the amount of carbon embodied in a product consumed in a given economy, taking account of where the inputs to that product were extracted and processed all along the supply chain. The method is generalized to apply to all factor inputs, including materials and energy, as well as pollutant emissions and can track not only the flows of factors and goods as imports and exports along the global supply chain but also the payments for these inputs made by ultimate consumers along the global value chain. The new method makes use of absorbing Markov chains that track downstream and upstream flows. These chains are first described in terms of the mathematics of a one-region input-output model and then generalized to the global framework of a multiregional world economy. The paper also describes the standard way of solving this problem, which we call the Big A method, and indicates the main advantages of the Markov chain approach, namely that it is implemented without loss of information using a more compact database and can address a wider range of questions, especially ones related to the recycling of materials. Finally, the paper discusses the parameter requirements distinguishing this type of ex-post analysis from model-based exploration of alternative scenarios about the future and makes the case for combining the two. C63, C67, F18, Q56, Q57