Energy and Climate Change CommitteeMemorandum submitted by the Best Foot Forward

The object of this report is to investigate whether it would be practical and beneficial for the UK to adopt consumption-based accountability in assessing GHG emissions. Consumption-based accountability assigns responsibility for emissions arising from goods and services to the consumer, and not the producer. This new system of assessing emissions has been already discussed in several studies (Jackons et al, 2007; Carbon Trust, 2011; Peters et al 2005, 2008; Munksgaard et al 2001, 2005) which have shown that the use of a consumption-based accountability approach could increase GHG emissions generated in the UK. Jackons et al (2007) who have showed that based on the production-based accounting method the overall emissions were 164.7 MtCO2 in 2002, while the use of the consumption-based accounting method generated 176.4 MtCO2. The main advantage of the consumption-based approach could be a more accurate analysis of emissions associated with the goods consumed by people in the UK. The current system underestimates the quantity of emissions generated by many developed economies which are more service-oriented and import significant amounts of manufactured goods from overseas.

Introduction to the Problem

The UK’s reported greenhouse gas emissions have decreased since 1990, in line with our commitments under the Kyoto Protocol. However, it has been suggested that this is a result of the way that emissions are currently accounted for, which is on a production basis. Production-based emissions reporting only takes account of emissions produced physically within a particular territory. If a consumption-based accounting approach was to be used—that is, reporting the carbon embedded in all of the goods and services consumed within the UK—it is very likely that the emissions attributable to the UK would be shown to have been increasing.

It has been argued that the UK and the developed economies are partly responsible for the substantial and rapid increase in emissions from developing countries, as we outsource manufacturing and then import products. The scale of greenhouse gas emissions embedded in trade between countries has made negotiations on global emissions reductions difficult and complex.

This inquiry will explore whether there is a case for the adoption of consumption-based emissions reporting in the UK, whether it is feasible to do this in practice, whether emissions reduction targets might be adopted on a consumption basis, and what the implications for international negotiations on climate change might be if the UK, and others, took this approach.

The Committee will examine the case for consumption-based greenhouse gas emissions reporting in the UK. The Committee invites responses addressing some or all of the following questions:

How do assessments of the UK’s greenhouse gas emissions differ when measured on a consumption rather than a production basis?

Is it possible to develop a robust methodology for measuring emissions on a consumption rather than production basis and what are the challenges that need to be overcome to deliver this?

What are the benefits and disadvantages associated with taking a consumption-based rather than production-based approach to greenhouse gas emissions accounting?

Is there any evidence of industry relocating from the UK to other countries as a result of UK climate change policy?

Would it be (a) desirable and (b) practicable for the UK to adopt emissions reduction targets on a consumption rather than production basis?

What are the potential implications at the international level of the UK adopting a consumption- rather than production-based approach to greenhouse gas emissions accounting?

Are there any other issues relating to consumption-based emissions reporting that you think the Committee should be aware of?

Best Foot Forward’s Response to an Inquiry of DECC

Introduction

1. This paper will investigate the issue of developing greenhouse gas consumption-based accounting (CBA) for the UK. Many experts have expressed their concern that if imports were included in the national emissions inventory (NEI) the UK could be responsible for higher emissions (Rees, 2011). According to Helm and Mackay (cited in Rees, 2011) UK GHG emissions reductions are just an “illusion”. The current accounting of GHG is based on the production-based method where: “the production of CO2 intensive goods for export is charged to the national CO2 account of the country where goods are produced. Contrary to this the import of goods is charged to the CO2 accounts of a foreign producer country. Open economies facing national CO2 targets and having a big net export of CO2 intensive goods therefore have to make an extra effort to reduce domestic CO2 emissions” (Munksgaard & Pedersen, 2001:327). So, an alternative to this is the consumption-based approach (CBA). This accounting method could provide a more detailed picture of the current release of GHG emissions within the UK territory. The Stockholm Environment Institute (SEI) (2008) argues that British emissions would have been 18% higher between 1992 and 2004 if a consumption-based approach (CBA) to accounting emissions was used.

Development

2. According to CBA consumers are responsible for the whole environmental impact of the production process. This type of accountability might register higher level of GHG emissions for developed countries (Jackson, 2007). However, CBA is more suitable “to evaluate the effectiveness of climate mitigation measures and to trace the development of the responsibility for greenhouse gas emissions over time” (Larsen & Hertwich, 2009:797).

3. It can be argued that in the CBA “producers are not directly motivated to reduce emissions, while consumers, instead, should in theory assume responsibility for choosing the best strategies and policy by showing a preference for producers who are attentive to GHG reductions” (Bastianoni et al, 2004:255). However, consumers may not be fully informed about policies adopted by different producers (transaction costs) and “without adequate incentives […], consumers are not likely to be sensitive with respect to their environmental responsibility, having in fact non consumption limits” (Bastianoni et al, 2004:255).

Q1: How do assessments of the UK’s greenhouse gas emissions differ when measured on consumption rather than a production basis?

4. Accounting methods have different impacts on reporting the total volume of national GHG emissions. Current method, which is based on the production basis, underestimates the quantity of GHG emissions generated by developed countries as those countries import (carbon intensive) goods from overseas rather than producing them themselves. This is known as “carbon leakage”. Using consumption-based approach would mean that UK emissions would be 18% higher (SEI, 2008).

5. The CBA can be developed in two ways. The first one is the Environmentally Extended Bilateral Trade (EEBT) approach which assesses the trade of emissions between two countries (Carbon Trust, 2011). The second approach, Multi-Regional Input-Output (MRIO), consists of “the assessment of full upstream or downstream flows of emissions including those passing through intermediary countries” (Carbon Trust, 2011:1). The EEBT takes into consideration imports and exports of emissions included in trade (Carbon Trust, 2011). “EEBT models adjust existing production-base assessment of GHG emissions by country, by correcting for the emissions embodied in trade (imports and exports) with direct trade partners” (Carbon Trust, 2011:2). However, it is important to outline that only emissions generated in the trading countries are allocated, while all other emissions generated during the manufacture of the goods occurring outside the two trading countries are not considered. For instance, this method assesses all emissions occurred:

in the assembly of a car generated in country A; and

all emissions related the use of the car in country B.

The exporting country will have a reduction in emissions in its NEI, while the importing one will have an increase. However, this method does not assess all emissions occurring between the assembly and the use of the good, such as the production of the car engine occurring in a different country (Carbon Trust, 2011).

6. The MRIO approach is more complex since it allocates all emissions to the country of consumption of goods and services. So, in the case of the car all emissions generating from the assembly of the car, production of the engine, to the smelting of metals are re-allocated to the country of consumption (Carbon Trust, 2011). By implementing this method into the UK economy, it has been estimated that there would have been an increase of the total emissions of 34% in 2004, while under the EEBT scenario the increase would have been around 25%1 (Carbon Trust, 2011).

7. Jackson et al (2007) argue that in a PBA system the total emissions of the UK were 164.7 MtCO2 in 2002. While, adopting a CBA carbon emissions would have resulted in 176.4 MtCO2 in 2002 (Jackson, 2007). The difference of 11.7 MtCO2 between the two is due to the different treatment of imports and exports. In particular, Jackson (2007) has developed a reconciliation of PBA and CBA. This study showed that UK consumption emissions were 165.4MtCO2 in 2002, by adding 11.0 MtCO2 of aviation fuels the total emissions amounted at 176.4 MtCO2 in 2002. However, these figures differentiate from those published by Defra (e-Digest) in the same year. According to Defra the overall emissions were 149.0 MtCO2, which do not take into account the following emissions:

Aviation emissions (11.0 MtCO2).

Lower water transport emissions (4.8 MtCO2).

Defra emissions are based on production-based principles. So, the difference of 11.7 MtCO2 is due to the carbon trade balance (Jackson, 2007).

From these findings it has been observed that carbon footprints of UK imports were higher than the export ones. This might be due to the shift of the UK to a service-based economy. However, the carbon trade balance of 11.7 (above) MtCO2 might be a lower value than expected (ibid). This may be due to the “domestic technology assumption” that trading countries have similar production processes and environmental standards as the UK (Druckman et al, 2007:8; Hertwich and Peters, 2009 and 2010). This problem has been also highlighted by Druckman et al, (2007) who assessed emissions from 1990 to 2004 in three different scenarios. According to IPCC, emissions have decreased by 5.6% in this period, while the Environmental Accounts suggest an increase of 0.3%. In the case of CBA these emissions have been estimated to be 8% higher (Druckman et al 2007). Moreover, according to Peters and Hertwich (2008a) the balance of embodied emissions in trade (BEED)2 was 585.5 MtCO2 in China, while was −102.7 MtCO2 in the UK. Generally speaking, it can be argued that Annex B countries are net importers of GHG emissions (ibid). According to Davis and Caldeira (2010) the first five net importers of GHG emissions were the USA, Japan, the UK, Germany and France in 2004. In particular, the UK was exporting 0.1 GtCO2, while imports were about 0.35 GtCO2 in 2004 (Davis and Caldeira, 2010).

Q2: What are the benefits and disadvantages associated with taking a consumption-based rather than production-based approach to greenhouse gas emissions accounting?

8. The main advantages of adopting the CBA are:

Fair accountability of assessing GHG emissions.

Elimination of carbon leakage.

Better world coverage of emissions.

Greater consistency between national consumption and environmental impact.

Development of a greater portfolio of mitigation policies.

Better identification of the origin and the cause of emissions.

Technology transfer between developed and developing countries.

Shared responsibility of exploitation of natural resources.

The main disadvantages are:

Uncertainties of assessment: high degree of complexity and low transparency.

Lack of input-output data with a worldwide coverage.

Lack of international cooperation to share data (explained in paragraph 23).

9. Production-based accounting can be quite simple but ethically unfair to apply because a country that has a high level of imports may have low level of GHG emissions. Consequently, all costs associated with CO2 reductions are born by countries where goods are produced (Bastianoni et al, 2004). This is a typical situation where developed countries outsource their industries to developing countries and the latter have to bear costs of reducing GHG emissions. On the other hand, CBA can be considered fairer since all the costs are born by the importing countries which consume final products (Bastianoni et al, 2004).

10. Several authors, Kondo et al (2008), Munksgaard and Pedersen (2001), Lenzen et al (2004), and Munksgaard et al (2005) have discussed the main advantages of the CBA approach. In particular, these advantages include eliminating the carbon leakage through imports, having a better coverage of global emissions and a higher consistency between national consumption and environmental impact, and expanding the portfolio of mitigation options and integrating policies, such as the Clean Development Mechanism, into the NEI (Peters, 2008).

11. Furthermore, the CBA covers GHG emissions at a global level by indentifying where and why emissions are generated. This “provides a rigorous means for policy makers to identify where to target policies to give the most cost effective reductions in greenhouse gas emissions” (Peters, 2005). This approach might also encourage technology transfer from developed to developing countries since the former are even responsible for emission generated in the foreign regions (Peters, 2005). “Further, if a country has a natural resource base which is in global demand, then the country does not take all the responsibility for supplying the resource; instead, the users of the resource share the responsibility” (Peters, 2005).

12. However, CBA method has more uncertainties than the current PBA approach. Thus, the main two uncertainties occur when there is the allocation of GHG emissions from technologies to economic sectors and the inclusion of imports into the NEI (Peters, 2008). With respect to the first uncertainty, “NEI are constructed using fuel consumption in different technologies (eg Hoem, 2006) and this is well suited to the sectors used for UNFCCC reporting.” (Peters, 2008:19). Secondly, emissions are allocated to economic sectors based on the National Accounting Matrix Including Environmental Accounts (NAMEA) (ibid). This might increase uncertainties. Furthermore, there is no input-output database with a worldwide coverage. This may not allow proper assessment of GHG emissions.

Q3: Is there any evidence of industry relocating from the UK to other countries as a result of UK climate change policy?

13. UK and other developed countries are more services oriented and import significant amount of manufactured goods from overseas. These products have high embodied emissions because countries where these products are produced tend to have poor environmental standards or use “dirty” technological processes. This is one of the reasons why many industries have relocated their production from developed countries. This is known as “carbon leakage”. UK has been recognised as the third largest worldwide importer of GHG emissions in 2004.

14. Most of the developed countries have witnessed an ongoing decline in their production of energy-intensive goods within their national boundaries in the last few decades. This is partly due to the growth of service sectors (Jackson, 2007). Davis and Caldeira (2010) have argued that there is little evidence of a strong carbon leakage trend. However, the industrial growth of developing countries might indirectly threaten the regulation of global emissions (ibid).

15. On the other hand, according to some authors, Druckman et al (2007), Machado et al (2001), Ahmad and Wyckoff (2003), Papathanasopoulou and Jackson (in press), energy intensive industries are outsourced abroad so that emissions are not counted in the NEI. This allows the consumption of goods and services to rise by avoiding the financial costs of emission targets.

Q4: Is it possible to develop a robust methodology for measuring emissions on a consumption rather than production basis and what are the challenges that need to be overcome to deliver this?

16. Based on the literature review we can say that a robust CBA methodology exists and can be used for assessing national emissions. However, there are challenges: higher complexity, lower level of transparency, lack of data availability and comparability across countries.

17. The methodology concerning the EEBT and MRIO has already been developed and there exists a robust academic literature (response to Q1). The EEBT is simple and transparent. It can be considered consistent with bilateral trade and it can be implemented in situations where transparency is a key element (Druckman et al 2007). However, the MRIO has a similar approach to the Life Cycle Analysis, which considers emissions from cradle to grave. Due to this the MRIO model can provide more detailed analyses (Peters and Hertwich, 2006), but it has a higher degree of complexity and a lower level of transparency (Peters, 2008). Furthermore, data availability and comparability for all nations across the world can be key challenges to overcome in order to create an effective CBA.

Q5: Would it be (a) desirable and (b) practicable for the UK to adopt emissions reduction targets on a consumption rather than production basis?

18. Best Foot Forward has recognised the importance of adopting the CBA in order to track emissions more efficiently by addressing the problem of emissions origin. This may help DECC understand where emissions occur and where mitigation policies would be most efficient and effective. It would be desirable to adopt CBA in order to understand the origin of emissions and address proper actions by involving even local authorities and developing a robust NEI.

19. According to Druckman et al (2007) it can be argued that a CBA is consistent with national consumption and trade policy. It can provide a higher coverage of emissions in Annex I countries. However, it has a high degree of complexity, low transparency, and greater uncertainty (Druckman et al 2007). This approach might provide several advantages to developing countries. Thus, all emissions generated are allocated to the countries purchasing the exports (Peters, 2005). This could be a concern for the UK since some British firms, which want to take advantage of cheap labour costs in countries like India and China, might be obliged to use clean production technologies in the aforementioned countries (Peters, 2005).

20. By adopting such an approach the UK Government could understand from where GHG emissions derive. Francis (2004) has developed a detailed analysis of regional GHG emissions per household, which demonstrates that the highest emissions came from Northern Ireland (30 tCO2), South East (27 tCO2), London and East of England (26 tCO2) in 2001. By tracing emissions at consumption level it is also possible to understand the reasons for this trend. For instance, households in Northern England have a higher consumption of energy than families in the South England (Francis, 2004; Dodman, 2009).

21. So, by tracing emissions at consumption level it is possible to draw a more detailed picture of the national situation and consequently address the problem with the local authorities. This approach can track emissions more efficiently, evaluate the effectiveness of local climate change mitigation policies, and develop a robust NEI (not subject to changes in terms of industrial outsourcing and globalization trends). Thus, this approach can help identify areas in which interventions might be required to reduce GHG emissions (Dodman, 2009)

Q6: What are the potential implications at the international level of the UK adopting a consumption- rather than production-based approach to greenhouse gas emissions accounting?

22. The main implication of using CBA method is that developing countries will be responsible to a lesser extent for the emissions generated on their territory since developed countries own most of these emissions through imports. To adopt CBA worldwide new accounting framework will have to be created. Data availability may be another issue.

23. With regard to the inclusion of imports, it can be argued that a CBA has to include data from trading countries. This means that data from developed countries might be more accurate than those from developing countries (Peters, 2008). Another significant issue is the political power of governments, which can only develop policies concerning emissions they have generated. Generally speaking, governments have control on emissions generated within their own geographical boundaries (Peters, 2008). For instance, the UK government cannot control emissions generated in China. This means that the CBA needs a higher collaboration among governments in order to exchange data (ibid).

Conclusion

24. Best Foot Forward recommends that the UK should adopt a CBA approach in order to have better world coverage of emissions. Moreover, this approach could allow the establishment of far more effective targets, which reflect the environmental impact of UK consumption of goods and services. In fact, it has been argued that in developed economies consumption-based emissions are higher than those derived from the national production (Davis and Caldeira, 2010). This mainly reflects the result that 30% of consumption-based emissions were imported in the UK (ibid). A CBA could provide embodied carbon calculations for more products as well as a detailed comparative analysis of emissions intensities of goods produced in different geographical areas (Kejun, 2008). In this paper it has been mentioned the main advantages of the CBA, such as the elimination of carbon leakage, higher consistency, technological transfer, greater coverage of emissions for products as well as worldwide (Peters, 2008; Kejun, 2008). Furthermore, it would be very practicable for the UK to adopt the CBA since this approach can track emissions efficiently, assess the effectiveness of local climate change mitigation policies, and built a robust NEI. Moreover, this approach can identify areas in which interventions might be necessary to reduce GHG emissions (Dodman, 2009). However, in order to adopt CBA in the UK greater international cooperation is a key requirement (Peters, 2008). In conclusion, Machado et al (2001) argue that PBA encourages developed countries to reduce their domestic CO2 emissions through international trade. But, it might likely result in an overall increase in emissions worldwide (Wyckoff and Roop, 1994; Schaeffer and Leal de Sá, 1996).

October 2011

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1 This analysis has been developed by the International Climate and Environmental Research Oslo (CICERO) institute and the Technische Universität Berlin.

2 Embodied emissions in exports less embodied emissions in imports.

Prepared 17th April 2012