Energy and Climate ChangeMemorandum submitted by Defra, DECC and BIS

Summary

The UK’s consumption emissions rose by nearly 20% between 1990 and 2008, in contrast to the downward trend in our territorial emissions.

55% of the total emissions associated with goods and services purchased by UK households in 2004 occurred overseas.

Estimates of consumption emissions are useful to indicate their scale and how they are split between sectors and countries, but are not robust enough for target setting.

Evidence on consumption emissions has significant value in helping to target policies to change UK consumption patterns and may also help target overseas sources of imported emissions.

Consumption-based emissions reporting cannot replace the territorial approach to reporting, which is fundamental to global governance of climate change, but provides a useful complementary viewpoint.

Response to ECC Questions

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

1.1 The UK uses three different approaches to measure greenhouse gas emissions, and the Government publishes figures based on each approach:

Territorial basis: Emissions based on the UK greenhouse gas inventory, published by DECC—this is used as the basis for our reporting to the EC and UNFCCC, and forms the basis for reporting on progress towards our domestic and international emissions reduction targets. The inventory measures emissions on a territorial basis, so only includes emissions which occur within the UK’s borders. We have used “territorial” throughout this report to make comparisons between the existing reporting regime and the consumption approach referred to in the Committee’s questions.

Production or Residents basis: Emissions as measured by the UK Environmental Accounts, published by the Office for National Statistics (ONS)—these measure greenhouse gas emissions on what is referred to as a “residents” basis, which means that the figures represent emissions produced by UK residents and industry whether in the UK or abroad, but exclude emissions within the UK which can be attributed to overseas residents and businesses.

Consumption basis: Defra publishes research data that measures the emissions associated with goods and services the UK consumes and thus takes account of the emissions embedded within the manufactured goods and services which the UK imports and exports.

1.2 International emissions data, targets and action to mitigate climate change have focussed on territorial greenhouse gas emissions. However, it is now possible to make an estimate of consumption emissions as more evidence is now becoming available. The Government is monitoring total carbon dioxide emissions associated with UK consumption on an annual basis.

1.3 Estimated total greenhouse gas emissions: In 2008, UK territorial greenhouse gas emissions were 620 Mt CO2e but from a consumption approach they were significantly larger—1,071Mt. Total consumer emissions were therefore 75% higher than total territorial emissions.¹

1.4 Trends: UK territorial emissions have declined steadily since 1990, at around 1% per year (21% in total between 1990 and 2008). At the same time, emissions associated with UK consumption have been increasing as we consume more products from overseas. Taking a consumption emissions approach the UK’s greenhouse gas emissions have risen by nearly 1% a year (almost 20% in total between 1990 and 2008). If these trends continue, greenhouse gas emissions embedded in imports to the UK could be greater than UK territorial emissions by 2018.²

Figure 1

1.5 Geographical distribution of consumption impacts: According to an analysis of consumption emissions, 55% of the total emissions associated with goods and services purchased by UK households in 2004 occurred overseas.³ Over three quarters of overseas emissions occurred outside the European Union, 36% came from Asia and 12% from North America. The country with the highest level of emissions to satisfy UK consumption was China, by a significant margin. The next three were USA, Russia and South Africa (see Figure 2 below).

Figure 2

TOP 15 OVERSEAS CONTRIBUTORS TO 2004 UK CONSUMPTION EMISSIONS TOTAL³

NB: Due to the nature of the modelling and the international trade data available, all figures should be treated as estimates and used with caution.

1.6 Distribution by sector: The latest research data also indicates which products and sectors had the highest proportion of embedded carbon emissions in 2004. For products such as electronic equipment and clothing, which are mainly produced overseas, over 80% of the associated greenhouse gas emissions occurred outside the UK.

Figure 3

TOTAL UK GREENHOUSE GAS CONSUMPTION EMISSIONS (2004 DATA IN KILOTONS CO2E), SPLIT BY SECTOR AND BY UK/REST OF WORLD (ROW)³

NB: Due to the nature of the modelling and the international trade data available, all figures should be treated as estimates and used with caution.

2. 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?

2.1 This is a relatively new research area with a limited number of active researchers and little international experience. Recent work has focussed on development of a multi-regional input-output model and use of Global Trade Analysis Project (GTAP) data.^{4, 5, 6} As the accuracy and timeliness of research outputs in this area depends heavily on the raw data that is available, a wider acceptance within the international community will be needed in order to improve future data sources and methodologies.

2.2 A 2008 Defra research report “Development of an Embedded Carbon Emissions Indicator” developed an initial model for the assessment of greenhouse gas impacts associated with UK trade flows.⁷ This provides an indication of the scale of the impact and the growth trend. The resulting estimates have been published as part of the UK Government Sustainable Development indicators, as a contextual indicator alongside the reported territorial emissions.⁸ Ongoing research work will provide a high level analysis of the UK national carbon dioxide footprint, covering 131 product groups and all final demand categories on annual basis from 2011–16.⁹ A 2009 total is expected to be available in late 2011.

2.3 The current modelling methodology has been developed and scrutinised by leading academics. It reflects the state-of-the-art in the field, but currently cannot be considered to be sufficiently reliable for setting targets, and has only limited use in policy evaluation. This is due to the assumptions required to estimate the emissions, and to data availability constraints which mean that the latest detailed estimates of consumption emissions by country of origin are for 2004 and by product are for 2008. The limitations are described below:

2.4 Constraints on data availability and timeliness:

Ideally, up-to-date data for all trading partners covering more detailed information on emissions by sector as well as up-to-date consistent and detailed annual input-output analytical tables for all those countries would be required. Although the UN is making progress in setting standards for greenhouse gas emissions accounts, availability of this data will always be limited by the capacity and will of trading partners to provide it.

2.5 Methodological assumptions:

Emissions are attributed pro rata to spend. For example, a cheap flight is allocated a fraction of the emissions of a costly business class flight. Analysis of physical data in key sectors could improve this but would require laborious, sector specific analysis.

It is assumed that products within a product group, or sub-sectors within a sector, are homogeneous ie that all dairy products, or all electronic goods, have the same emissions intensity. The only way round this would be to have ever more detailed input-output tables.

2.6 In comparison, territorial emissions are easier to measure robustly, allowing statistics to be published for more recent years. The UK’s international reporting requirements for territorial emissions require more recent data (the UK’s last annual report to the UNFCCC was in April 2011 with data up to 2009). DECC published provisional 2010 territorial emissions in March 2011.

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

3.1 There are merits to both consumption and territorial based accounting and the two should be seen as complementary approaches rather than alternatives. Consumption-based accounting allows government to identify abatement associated with changing consumption patterns, while territorial based accounting enables scrutiny of policy that targets production processes. The Government believes that a territorial basis for accounting is the most appropriate basis for emissions to be measured under international reporting guidelines. Other key benefits and disadvantages of a consumption-based approach are outlined below.

3.2 Benefits of a consumption-based approach:

(a)Although the data is more uncertain in nature, looking at consumption emissions alongside producer emissions gives a more complete picture of the carbon emissions associated with the activities of UK citizens and businesses. The scale of consumption emissions relative to territorial emissions give a measure of the risk that reductions in UK territorial emissions could be counteracted or substituted by increases in embedded emissions in imports. Consumption emissions accounts can identify the largest sources of these overseas emissions, providing a good starting point for considering what scope there is for the UK to address them.

(b)In a world of increasing global trade, it could be argued that since both consumers and producers benefit from production the responsibility for these emissions does not necessarily reside solely with the producer. While this has not been a priority issue for developing countries, who often worry that a change in approach could lead to protectionist anti-trade policies, it could also be argued that developing countries should not be entirely responsible for emissions associated with producing goods and services that are mainly consumed in the developed world. As noted above, a consumption approach can help identify where changes in how UK citizens consume could lead to overseas emission reductions that would be invisible in UK territorial accounts, but significant for global climate outcomes. This information can then be taken into account in UK and EU policy measures (eg under the Ecodesign Directive, or in sustainable procurement and voluntary sustainability labels).

(c)Analysis of the distribution of consumption emissions within sectors can contribute to assessment of the scale and nature of the risk of “carbon leakage” which could potentially be caused by relocation of industry from areas inside the UK/EU to jurisdictions which do not place a limit on greenhouse gas emissions.

(d)It is in line with the life-cycle approach that leading businesses are using to track the full supply chain impacts of their products and identify action areas.

3.3 Disadvantages of a consumption-based approach:

(a)Beyond changing domestic consumption patterns and action through business supply chains, countries have very limited ability to influence the carbon intensity of international supply chains, as they lack the sovereignty to determine policy in other countries. In contrast countries do have sovereignty over emissions in their own territory meaning that they can design effective policies to address them.

(b)Consumption-based emissions models are limited by the availability of international trade data, and rely on quite a number of assumptions (explained in Question 2 above). All figures should be treated as estimates and used with caution.

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

4.1 There is little evidence on the extent to which firm relocation has actually occurred and can be directly attributed to UK or EU climate change policy, although some industry representatives (eg Intellect) have stated that they view UK climate change policy as a disincentive to investment in the UK and Tata Steel have cited it as a contributing factor to one plant closure decision. There are however a number of ex-ante studies of the likely impact on carbon leakage (movement of production from areas that place a limit on emissions to jurisdictions that do not have such a limit) from climate change policies (notably the EU Emissions Trading System). There are also a number of intermediate indicators (notably cost pass through rates) that may also indicate whether relocation due to climate change policy is likely to occur.

4.2 A number of studies have shown that the risk of carbon leakage is likely to be limited to a small number of sectors. These sectors are those that are relatively carbon intensive (ie high carbon content per value of production) and high trade intensity (high levels of imports and exports per unit of production).

4.3 In the context of the EU ETS, the evidence (eg Climate Strategies,^{10, 11} Oko Institute¹²) points to a limited number of sectors being at significant risk of carbon leakage; those that appear consistently are iron and steel, cement, lime, fertilisers, refineries, aluminium and chlor alkali. This is based on research into the production impacts of the ETS and the impacts of non-EU trade intensity. Further work to supplement this has looked at cost pass through, the implications of full auctioning and the impact of a 30% emissions reduction target for the EU.¹³ Studies also show that provisions for the free allocation of emission allowances go a long way to managing the risk of carbon leakage.

4.4 Concerns around carbon leakage arise as industries that are subject to international competition may not be able to fully pass on the costs of carbon to consumers, thus making them unviable. Empirical analysis has suggested that the majority of industrial sectors, including those with high trade intensities such as iron and steel, have been able to pass on a significant proportion of the carbon price into the final consumer price, thus mitigating the risk of leakage.

4.5 The Government has announced that by the end of 2011 it will announce a package of measures for energy intensive businesses whose international competitiveness is most affected by our energy and climate change policies in order to reduce the impact of government policy on the cost of electricity for these businesses.

4.6 A structural decomposition analysis of the UK 1992–2004 carbon emissions trends has examined the drivers for emissions reductions. 30% of the production or residents’ emissions savings over this period could be attributed to relocation of production (with the remainder due to efficiency, shift to services, and switch to gas).¹⁵ This does not demonstrate any causal link between business decisions to relocate and climate policy, as business decisions reflect a diverse range of structural and cyclical economic factors. Wider economic trends that have driven globalisation include removal of trade barriers and improvements in the investment conditions in developing countries that have meant that their resources (natural and a relatively low-cost labour force) are making an increasing contribution to the global economy. The EU’s Emission Trading Scheme was not introduced until 2005 so this and the majority of the current climate policy framework could not have been influencing the trend prior to this point.

Figure 4

SAVINGS IN UK NON-HOUSEHOLD CO2 PRODUCTION EMISSIONS 1992 TO 2004, ACHIEVED BY RELOCATION OF PRODUCTION AND OTHER FACTORS ¹⁵

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

5.1 Adopting consumption emission targets in the place of production emission targets would be a breach of the UK’s international obligations under the UNFCCC and Kyoto Protocol. However, consumption and production approaches to emissions accounting are not mutually exclusive. It is desirable for the UK to understand, measure and be open about the overseas impacts associated with consumption of imported goods and services. The relative significance of these impacts could increase when we successfully decrease territorial emissions. Data on total consumption emissions and on the breakdown between geographical areas and types of products could be used to help target action on consumption by UK households and businesses, and to inform UK engagement with overseas partners (eg through bilateral agreements and trade and development policy).

5.2 It would not be desirable to undermine the current territorial accounting methodology, which is fundamental to the UK’s approach to carbon budgets and international commitments and negotiations. The territorial approach has been agreed internationally and seeking to unpick this would require difficult negotiations that may well not succeed and would provide a distraction from other crucial areas of the negotiations. Switching to a consumption based approach would be a mistake. The territorial approach was chosen for good reason, because countries have a much greater ability to influence production activities in their own territory than to influence emissions from goods which are consumed in their country but produced overseas. Some commentators have suggested we could consider introducing carbon standards for imported goods as a solution to this problem, but trade measures could risk a negative retaliatory response.

5.3 This means that the preferred route to reduce global emissions is for legal domestic commitments to address territorial emissions, and to reach a broad international agreement with ambitious commitments for developed and developing countries to reduce emissions according to their capabilities. This is the basis for the UK’s approach to carbon budgets and the global climate change negotiations.

5.4 Even if consumption based greenhouse gas accounting were a desirable approach for managing global emissions it is not currently practicable. As described in Question 2 above, the current consumption emissions measurement methodology is not sufficiently reliable for use in or setting targets.

6. 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?

6.1 The UK currently has international reporting requirements under the UN Framework Convention on Climate Change (UNFCCC), the Kyoto Protocol and the EU Monitoring Mechanism. To meet our reporting requirements under the UNFCCC and Kyoto Protocol we prepare an annual Greenhouse Gas inventory reporting on all UK green house gas emissions in a given year and historically back to 1990. Given the challenges in gathering emissions data, each inventory reports on the annual emissions from two years previously. Every four years, we prepare a National Communication which, as well as annual emissions data, includes detail on the national policies we are putting in place to deliver our international emissions reduction targets to enable an assessment of whether we are on target to deliver our commitments. To meet our additional reporting requirements under the EU Monitoring Mechanism we submit, every two years, a report on projected future UK emissions.

6.2 As set out in our response to Question 5 above, our international reporting is based on territorial accounting. We have negotiated this with other countries and committed to it internationally. If the UK switched to reporting its emissions exclusively on a consumption basis, we would be breaching our obligations under the UNFCCC and Kyoto Protocol. In addition, the UK would be undermining the very process of ensuring that there was a robust global approach to monitoring, reporting and verifying emission levels and mitigation action that we are trying to build. It would have a major impact on the UK and EU’s reputation and influence in the international negotiations.

6.3 Although consumption emissions data can provide insights into how to decarbonise economies, the current lack of data and understanding on developing country emissions would make it extremely difficult to undertake global emissions accounting on this basis—consumption emissions, because they are difficult to calculate accurately, are uncertain and not easily verified. As discussed in Question 3 above, there are relatively few policies to target emissions embedded in imports, due to the lack of sovereignty over imported emissions. It is therefore likely that a universal change to setting targets on a consumption basis would lead countries to reduce their ambition.

6.4 It would be probably be impossible to negotiate a global emissions reduction treaty based on consumption emissions with other countries. We are not aware of any interest in this approach from other countries and discussion of consumption emissions in the negotiations inevitably leads to discussion of trade sanctions against carbon intensive production. This is a particularly sensitive issue with the potential to derail the international negotiations and set us back decades in reaching an effective global solution to climate change.

6.5 The UK has started to collect information on consumption emissions and we could consider ways in which we could join up the presentation of our information to show a more complete picture. Introducing fuller accounts of consumption emissions alongside the UK’s territorial accounts could help target current and future policies to reduce consumption impacts. The Swiss and Swedish governments have also invested in evidence work to identify their consumption emissions,^{16, 17} and as other countries begin to account systematically for the impacts of their consumption there may be potential to work collectively and with producer countries to focus domestic policy to address common sources of high impact.

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

Not applicable.

October 2011

References

¹ Defra data on greenhouse gas emissions relating to UK consumption. Available at:
http://www.defra.gov.uk/statistics/environment/green-economy/scptb01-ems/

² Carbon Emission Accounting—Balancing the books for the UK. An Energy Insight Briefing Paper, UK Energy Research Centre, Reference: UKERC/BP/CO2EMI/2011/001

³ Barrett J, Owen A, Sakai M (2011) UK Consumption Emissions by Sector and Origin, Report to the UK Department for Environment, Food and Rural Affairs by University of Leeds. Defra, London.

⁴ Thomas Wiedmann, Richard Wood, Jan C Minx, Manfred Lenzen, Dabo Guan, Rocky Harris. A carbon footprint time series of the UK—Results from a Multi-region Input-Output Model. Economic Systems Research , Vol. 22, Iss. 1, 201.

⁵ Thomas Wiedmann, Harry C Wilting, Manfred Lenzen, Stephan Lutter, Viveka Palm. Quo Vadis MRIO? Methodological, data and institutional requirements for multi-region input–output analysis. Ecological Economics 70 (2011) 1937–1945.

⁶ J C Minx, T. Wiedmann, R. Wood, G P Peters, M. Lenzen, A Owen, K Scott, J Barrett, K Hubacek, G Baiocchi, A Paul, E Dawkins, J Briggs, D Guan, S Suh, F Ackerman. INPUT-OUTPUT ANALYSIS AND CARBON FOOTPRINTING: AN OVERVIEW OF APPLICATIONS, Economic Systems Research Vol. 21, Iss. 3, 2010

⁷ Wiedmann, T, Wood, R, Lenzen, M, Minx, J, Guan, D and Barrett, J (2008) Development of an Embedded Carbon Emissions Indicator—Producing a Time Series of Input-Output Tables and Embedded Carbon Dioxide Emissions for the UK by Using a MRIO Data Optimisation System, Report to the UK Department for Environment, Food and Rural Affairs by Stockholm Environment Institute at the University of York and Centre for Integrated Sustainability Analysis at the University of Sydney, June 2008. Defra, London, UK.

⁸ Measuring progress: Sustainable development indicators 2010. Defra, London.

⁹ Defra Science Project ET0101 (2010–2016): Embedded Carbon Emissions Indicator.

¹⁰ Susanne Dröge and Simone Cooper (2010), Leakage in a world of unequal carbon prices—A study for the Greens/EFA, Climate Strategies, 2010.

¹¹ Jean-Charles Hourcade, Damien Demailly, Karsten Neuhoff, and Misato Sato (2007) Differentiation and Dynamics of EU ETS Industrial Competitiveness Impacts, Climate Strategies, 2007.

¹² Graichen et al (2008) Impacts of the EU Emissions Trading Scheme on the Industrial Competitiveness in Germany, Oko Institute.

¹³ DECC (2010). A report by Cambridge Econometrics, Climate Strategies and Entec UK for the Department of Energy and Climate Change, 19 August 2010.

¹⁴ Eg Alexeeva-Talebi (2010); “Cost Pass-through in Strategic Oligopoly: Sectoral Evidence for the EU ETS”, Oberndofer et al (2010); “Understanding the competitiveness implications of future phases of EU ETS on the industrial sectors”, De Bruyn et al (2010); “Does the energy intensive industry obtain windfall profits through the EU ETS? An econometric analysis for products from the refineries, iron and steel and chemical sectors”.

¹⁵ Minx, J C, Baiocchi, G, Wiedmann, T and Barrett, J, 2009, Understanding Changes in UK CO₂ Emissions 1992–2004: A Structural Decomposition Analysis, Report to the UK Department for Environment, Food and Rural Affairs by Stockholm Environment Institute at the University of York and the University of Durham, DEFRA, London, UK.

¹⁶ Jungbluth N, Nathani C, Stucki M, Leuenberger M 2011: Environmental Impacts of Swiss Consumption and Production. A combination of input-output analysis with life cycle assessment. Federal Office for the Environment, Bern. Environmental studies no. 1111: 171 pp Switzerland.

¹⁷ The Climate Impact of Swedish Consumption, Report 5992, Swedish Environmental Protection Agency, 2010.