Energy and Climate Change CommitteeMemorandum submitted by EDF Energy

Executive Summary

EDF Energy recognises that a share of the emissions in many countries is due to the production of goods for export to others, and that there is value in understanding the carbon emissions embedded in such traded products.

We believe that taking a consumption-based approach could be a useful first step in overcoming the impasse between developed and developing countries in agreeing a successor to the Kyoto Protocol.

Consumption-based reporting could also be an initial step towards measures which would seek to incorporate the embedded carbon cost into all products regardless of origin, and would ensure that emissions-intensive products are priced accordingly.

However, consumption-based reporting calculation still relies on data being captured accurately at the point of emission. Subsequently, tracking embedded carbon accurately along whole supply chains will be complex, although likely to be easier for some goods and services than others.

About EDF Energy

EDF Energy is one of the UK’s largest energy companies with activities throughout the energy chain. We provide 50% of the UK’s low carbon generation. Our interests include nuclear, coal and gas-fired electricity generation, renewables, combined heat and power plants, and energy supply to end users. We have over 5 million electricity and gas customer accounts in the UK, including both residential and business users.

EDF Energy’s Response to Your Questions

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

1. EDF Energy is aware of the growing body of literature comparing production-based reporting to that measured on a consumption-basis. These have generally concluded that assessments on a consumption-basis, which take into account emissions embedded within imports of traded goods and services, would actually increase the level of emissions that developed countries are responsible for. For example, we note that recent analysis published by the Carbon Trust1 shows that the UK’s consumption emissions are 34% higher than its production emissions, a ratio that places the UK ahead of countries such as Germany, Japan and USA. Similar work by Helm, Smale and Phillips2 has shown that UK emissions (measured on a production basis) fell by 15% between 1990 and 2005, thus putting the country on track to meet its Kyoto Protocol obligations. However, once these figures was adjusted for carbon imports, aviation and shipping, the UK’s emissions actually increased by around 19% between 1990 and 2003.

Q2. 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?

2. Although we recognise the difficulties involved, we believe that it would be possible to develop a methodology to measure emissions on a consumption basis. The methods adopted in recent academic studies are still developing and are a useful starting point for such an assessment. We believe that the studies conducted so far already give a good indication of the size of the impact if countries were to start taking into account the embedded emissions within their imports.

3. We believe that the main challenge would be in accurately identifying the individual carbon intensity for each good and service exported by a country. A further challenge would be incorporating emissions of transport and supporting services, where accurate allocation is likely to be difficult and time-consuming. Similarly, where materials are imported to make an intermediate product which is then exported by the manufacturing country to a third country, it is not clear which of the emissions during that process are related to “consumption”.

4. A major determinant of carbon footprint is energy consumption, which would mean identical products manufactured in different jurisdictions could have radically different associated emissions. Overall, this methodology may be achievable with larger emitters in simpler processes, but would be challenging to track through complex multi-stage processes.

Q3. What are the benefits and disadvantages associated with taking a consumption-based rather than production-based approach to greenhouse gas emissions accounting?

5. EDF Energy believes that there is merit in the case for a consumption-based approach to measuring carbon emissions. The benefit from, an equity perspective, is that those responsible for emissions should be made accountable for them, no matter where they are produced and would more accurately reflect the rationale behind the “polluter pays principle”. This would prevent countries from simply “offshoring” their emissions to countries with less rigorous environmental standards, and who have not as a result genuinely reduced their emissions, despite claims to the contrary.

6. We also agree with the conclusion of Davis and Caldeira, who state that “sharing responsibility for emissions among producers and consumers could facilitate international agreement on global climate policy that is now hindered by concerns over the regional and historical inequity of emissions”.3 We believe that taking a consumption-based approach could be a useful first step in overcoming the impasse between developed and developing countries in agreeing a successor to the Kyoto Protocol. The reality is that mitigating climate change is a global problem and requires a global solution. It is important to be clear that even if the UK and EU meet their targets, this by itself is not enough to tackle climate—it is imperative that there is a global agreement with all countries taking positive steps to achieve a compromise.

7. A key concern among many EU countries is whether Member States are being put at a disadvantage by acting “unilaterally” on climate change reforms through initiatives such as the EU ETS which help place a price on carbon. The move to a consumption-based approach to measuring emissions raises the possibility of border adjustment measures to address the issue of “carbon leakage”. In principle, these could help level the carbon playing field by ensuring that the environmental and social cost of greenhouse gas emissions are internalised and reflected in the price of goods and services. As Dieter Helm states, these measures “should not discriminate between the geographical origins of the emissions, but rather focus on the consumption decision. It does not matter from a climate change perspective whether the emissions are in China or the UK.”4 We are aware that any border adjustment measures are likely to raise practical and legal concerns but we believe that this is an area that will need to be looked at carefully, including a detailed and objective assessment of its merits, drawbacks and impacts.

8. The main disadvantage is one of practicality and involves the complexity of obtaining verifiable data to use as the basis for these calculations. Even if issues of methodology can be overcome, consideration will need to be given as to whether there is sufficient time to enact these changes, given the likely opposition from those countries that are most likely to “lose” from the move.

Q4. Is there any evidence of industry relocating from the UK to other countries as a result of UK climate change policy?

9. Industries have moved around the world as global economies have liberalised and protectionist trade barriers have been removed and this will continue in the future as market efficiency optimises the use and deployment of capital. Clearly the extent to which the costs of carbon emissions are internalised in output costs, to the extent that these costs are material or not, will also have an influence on industry decisions on location.

10. The costs of climate change policy in the UK are seen mainly through the impact of the EU ETS where the costs are manifest in either the direct costs of having to buy emission trading certificates and/or the cost of carbon embedded in energy costs.

11. Industry participants in the EU ETS have received free allowances to cover their carbon emissions in the first two phases of the EU ETS. This is set to change in Phase 3 of the EU ETS which begins in 2013 and a substantial amount of work has been done by the EU and UK Government to establish the potential risk of carbon leakage in various sectors. This work has highlighted that specific sectors such as the steel, aluminium and some industrial chemical manufacturing processes face potential risks of relocation as a result of high carbon prices. The EU is responding to this concern by extending the period for which these industrial sectors will continue to receive free allowances.

12. The costs of climate change policy embedded in energy costs are also influenced by wider energy policy objectives for renewable energy and the carbon costs arising from the EU ETS. EDF Energy has maintained that sustainable energy supplies for the UK must deliver physical and economic security of supply, low carbon and affordability. Ensuring we strike the right balance between these objectives will be essential in ensuring that UK business has access to competitive energy supplies.

13. The UK faces a real challenge to replace its ageing power stations and has a choice to continue to allow the construction of more gas fired power stations or provide a sufficiently robust framework to underpin investment in low carbon generation. EDF Energy agrees with the Government and other bodies such as the Committee on Climate Change that have said that bringing forward important investment in low carbon electricity generation now offers the best route to limit potential energy cost increases, protecting UK consumers and industry for the longer term.

14. In this respect, we believe the UK Government has made important progress in setting out a new, coherent reform framework to drive new investment. Investment in low carbon generation will improve price stability, through reducing exposure to volatile fossil fuel prices, resulting in a more predictable cost base for energy users. In addition, the investment in new energy infrastructure will also help drive low carbon economic growth in the UK, creating business opportunities across the UK’s supply chain for any company involved in low carbon energy.

15. EDF Energy has been quite clear in advocating the need for longer term certainty on carbon price in minimising the impact on other industrial sectors covered by the EU ETS. EDF Energy therefore welcomed the Government’s implementation of the carbon price floor as the level of the tax retains a direct link to the EU ETS and its direct impact will be restricted to the electricity sector. We believe this strikes the right balance between meeting the needs of policy makers, consumers and investors in low carbon electricity generation. EDF Energy also welcomed the relief HM Treasury has made available to large industry by increasing the rebate available under the Climate Change Agreements (CCAs) and the extension of the duration of the scheme. In its response to the consultation, HM Treasury also clarified that it would not be introducing a levy on electricity consumers that had been proposed to raise money to fund the Carbon Capture and Storage (CCS) demonstration projects in the UK.

16. While our commitment to decarbonisation remains strong we are equally clear about the need to maintain cost competitiveness of UK manufacturing and energy intensive industries. EDF Energy is keen to work with industry and Government to view this as a whole, taking a holistic view of taxes and obligations and ensuring that investment in the most affordable technologies is prioritised.

17. However, it is also worth noting that energy supplies are only one part of the enabling framework that is needed by UK industry. The UK must ensure that other elements of the UK infrastructure are also fit for purpose and make the UK an attractive place to host export companies. This includes:

Competitive productivity performance which will be essential to give the UK an edge; developing appropriate national skills in engineering and science will play a key role in achieving this.

Good transport and communications infrastructure.

18. A UK industrial strategy can only succeed if these fundamental building blocks are in place.

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

19. The UK’s “carbon consumption” is made up a number of goods and materials consumed by the UK population and it is likely to remain the case that the UK will continue to rely on imports to meet some of its consumption needs. However, as noted in our response to Q3, one of the main disadvantages of reporting emissions on a consumption basis will be the difficulty in obtaining robust and reliable data. For the same reason we believe it would be inappropriate for the UK to adopt a target based on consumption.

20. The real benefit will lie in trying to develop reporting methodologies that can provide greater transparency on the embedded carbon content of products and the extent to which the costs of carbon emissions have been internalised in the costs of products. This information could then be used to improve the effectiveness of climate change policy by avoiding policy measures that simply relocate emissions. Depending on the progress that can be made on reporting methodologies, and the confidence that can be attached to the reports, it may enable administrations to apply border adjustment measures for carbon intensive products to ensure that carbon costs are internalised more effectively.

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?

21. There is certainly a value in measuring and publishing consumption-based emissions data, as it would be an effective tool for demonstrating the concept of “embedded carbon” and also of the practice of “offshoring” emissions.

22. As many countries already use a production-based approach via regimes like the EU ETS, it would be desirable for any new measures to complement the existing production-based approach rather than be proposed as a replacement for it.

23. The methodology used to gather the data should be fully transparent, and any measures to equalise carbon costs at the border will require the full support of both exporting and importing nations in accordance with internationally agreed principles.

Q7. Are there any other issues relating to consumption-based emissions reporting that you think the Committee should be aware of?

24. No.

October 2011

1 Carbon Trust, International Carbon Flows, May 2011.

2 Helm, D R, Smale, R and Phillips, J, Too Good To be True? The UK’s Climate Change Record, December 2007.

3 Davis, S J and Caldeira, K, Consumption-based accounting of CO2 emissions, January 2010, as quoted in Brinkley, A and Less, S, Carbon Omissions, October 2010.

4 Helm D, The Case for Carbon Taxes, in Less, S (ed), Greener, Cheaper, Policy Exchange, July 2010.

Prepared 17th April 2012