Assessing the costs of fossil dependency: an integrated model for carbon costs across economic sectors in China and Germany

Fossil dependency has a significant cost impact on the economy, making sectors vulnerable to rising carbon costs. Economic sectors are impacted by carbon costs from two sides: fossil inputs and carbon emissions. The success of climate policy initiatives can depend upon carbon costs. The input side has not received sufficient attention. The article presents a model that integrates the fossil input and carbon emission sides to assess the total cost of carbon using input-output modelling. The model provides a comprehensive analysis of the total costs associated with fossil dependency. The integrated approach reveals the embodied carbon costs that accumulate in various economic sectors. The examples of China and Germany serve as illustrative cases due to their strong dependence on fossil inputs but different levels of climate policy enforcement. The research findings revealed that certain downstream industries, characterized by substantial embodied fossil inputs, may be more vulnerable to increased carbon pricing than upstream industries. Falling prices of fossil inputs may counterbalance the impact of rising carbon emission costs. The integrated model for assessing the total carbon cost enables policymakers to develop more efficient policies tackling climate change.Policies related to fossil inputs are often developed independently of carbon emission policies. The two types of policy can be counterproductive if they are not integrated.Tightening emissions regulations could prove ineffective if fossil input prices fall.Due to spill-over effects, fossil input costs have a greater impact on certain downstream sectors, even if they are not directly targeted by carbon regulation.The cost of carbon emissions in the German economic sectors is much higher than in China. They are still negligible compared to fossil input costs in both countries. At current cost levels, emission allowances contribute little to the total costs of the economic sectors.