Abstract

This paper explores how global value chain (GVC) participation affects the comovement between real industrial value-added and emissions over business cycles. We follow Wang et al. (2022) and de Soyres and Gaillard (2022), first measuring the forward and backward links in GVC activities at the country and industry levels, covering 27 countries and 35 industries from 2007 to 2020. Specifically, we examine both Simple and Complex GVC activities by considering the inclusion of indirect transactions through third countries. Second, we conduct a panel analysis on the covariation between value-added and emissions during economic fluctuations and the relationship with GVC participation rates. We find that the increase in participation rates in forward-link GVC activities enhances the covariation between economic fluctuations and emissions, whereas the effects of the change in participation rates in backward-link GVC activities are statistically insignificant. All results are invariant for the advanced and emerging countries. In contrast to EU members, this pattern is reversed in countries that depend largely on energy trade from a global perspective, such as the United States, Russia, Korea, and Japan. Recent movements in climate change mitigation and environmental regulations are intertwined with the trade and financial environment, emphasizing the need to examine them from a volatility perspective rather than merely focusing on growth. In this context, we contribute by quantitatively presenting the covariation of economic fluctuations and emissions within GVC activities, going beyond existing literature that predominantly explores growth, the environment, and trade. Our contrasting results among country groups indicate that as countries worldwide pursue carbon neutrality, the divergence in positions among countries based on their dependence on energy trade may intensify the likelihood of trade disputes.