Energy and Climate ChangeMemorandum submitted by EEF/UK Steel

About EEF

EEF, the manufacturers’ organisation is the representative voice of UK manufacturing, with offices in London, Brussels, every English region and Wales. We are a not for profit organisation with a growing membership of almost 6,000 companies of all sizes, employing some 900,000 people from every sector of the engineering, manufacturing and technology based industries. UK Steel, a division of EEF, is the trade association for the UK steel industry. It represents all the country’s steelmakers and a large number of downstream steel processers.

Response

EEF/UK Steel’s submission examines the issues only in the context of manufactured goods. Although EEF/UK Steel support a long-term development of consumption based emissions monitoring, it would require a robust international agreement supported by an agreed international methodology. For this reason we do not feel that it would be either desirable, or practical for the UK unilaterally to adopt targets based on a different currency from the rest of the world in the short term. We recommend that the UK Government work with international partners to deliver a common approach in the medium term and assess the value of consumption emissions monitoring in the long term.

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

The shift of manufacturing activity out of the UK to cheaper locations, particularly for labour-intensive operation, is a well-documented long term trend. The emissions arising from those operations are currently accounted to the country in which they take place, not the country that is ultimately responsible for the emissions as a result of buying and consuming the goods in question.

Taking steel as an example (and ignoring the distortive impact of the recession), the total amount of steel consumed by the UK economy has continued to rise. We estimate this “underlying” consumption level at 26.9 million tonnes in 2007—the last full year not affected by the recession—compared with 21.1 million tonnes in 1997: an increase of 27%.

However, within that, over the same period the steel consumed in the form of imported finished goods (such as cars, washing machines, components etc) rose by 91%: from 6.6 million tonnes in 1997 to 12.6 million tonnes in 2007.

The following table demonstrates how the production of the steel consumed in the UK economy, and of course the emissions associated with that production, have shifted offshore:

Table 1

 

1997

2007

2007 over

2010

2010 over

Million tonnes

1997

Million tonnes

2007

UK steel mills’ deliveries to the UK market

8.6

6.5

−24%

4.8

−26%

Imports of steel mill products

5.9

7.8

32%

5.1

−35%

Steel contained in imported finished products

6.6

12.6

91%

9.6

−24%

Total steel consumed in the UK economy

21.1

26.9

27%

15.6

−28%

NB—The above table does not take account of the movement of scrap steel

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?

Whilst a consumption based reporting mechanism would set out the true GHG impact of our economy and thus better inform UK policy development, the complexity of international supply chains means that the issues involved in measuring consumption-based emissions would be challenging. The basic methodology would be to calculate the embedded carbon in all products traded across the UK’s borders. The carbon values of exports would be deducted from the UK’s direct emissions, while the values of imports would be added. However:

1.In the case of primary products such as semi-finished steel, it would be relatively simple to model the embedded carbon in UK exports, by tracing the products back to the producer, whose emissions in any given year will be known precisely.

2.Even for primary products however, calculating the actual embedded carbon in imports would be challenging. It would require firstly traceability of all imported primary products back to their producer, and secondly a comprehensive database of the actual emissions performance of all primary producers in the world.

3.In the case of steel there is a further problem. Steel is produced in two fundamentally different processes. The blast furnace/basic oxygen converter (BF/BOS) process uses virgin raw materials and is inherently carbon intensive. The electric arc furnace (EAF) route uses electricity to recycle old steel. This process is inherently far less carbon intensive. However, this recycling process depends on steel produced in the past for its feedstock. Even though scrap steel recovery is largely a mature market, there is insufficient steel scrap available in the world to enable this process alone to be used—EAFs could not exist without BF/BOS companies continuing to produce virgin steel. Steels produced using the two routes are indistinguishable from each other.

4.Further downstream the problems become massively more problematic. A primary product produced on one country might be further processed in a different country, then used in a component in another country and incorporated in a finished product in a fourth country. Without a globally-agreed comprehensive system of carbon certification, supported by robust verification, accompanying every single trans-frontier movement of goods it would be impossible to calculate the actual embedded carbon in imports and exports of most products. It is debatable if such a system could ever be agreed, and it would be immensely costly to business.

However, estimates of embedded carbon in traded goods could be made by using industry-agreed average values. This would not of course give precise values, but would give a reasonable indication of consumption-based emissions.

One further problem remains: how to account for emissions from the generation of electricity used in the manufacture of goods. This could only be done on the basis of each country’s grid average, or ignored.

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

The main benefit of a system based on average embedded carbon values would be that the extent of carbon leakage would become more transparent.

A carbon certificate based system of calculating actual embedded carbon values as outlined above would have the additional benefit of enabling consumer choice based on embedded carbon, thus for example encouraging the use of EU steel over say Russian steel. However, because of the complexity and costs involved and the need for a comprehensive international agreement, EEF does not advocate the adoption of such a system in the medium term.

Unfortunately, for the foreseeable future, production-based emissions accounting will be the only accurate methodology. EEF therefore does not believe that consumption-based accounting can, for the time being, replace production-based accounting; but it can complement it by giving policy-makers better information on the complex causes of shifts in emissions patterns.

Whilst these difficulties will be challenging to overcome in the medium term, the current method of applying a production based target in the UK, in the absence of an international agreement, arguably achieves little in terms of global progress to reducing GHG.

A US study published in the Proceedings of the National Academy of Sciences journal claims that rich countries, including the UK, are importing a third of their carbon dioxide emissions.1 Yet there appears to be little acknowledgement of this within UK climate change policy. Here lies the problem, whilst we acknowledge the extreme difficulties in moving to a consumption based reporting system, government policy (based on production based reporting) blindly ignores the global picture at the expense of the UK manufacturing sector.

Consumption reporting could conceivably result in UK climate change policy actually encouraging more manufacturing to take place in the UK, unlike the current production-based system, which will only lead to a further demise of the sector if our competitors are not subject to the same costs and burdens.

This is because production-based accounting results in an absolute cap on emissions from the country. As the cap tightens, the implications for carbon intensive sectors required to purchase allowances could become severe and lead to reduced levels of output. Consumption-based accounting on the other hand would shift the focus to the relative production efficiency of competing companies as the government sought to incentivise the consumption of products with the lowest relative carbon footprint.

If we accept that climate change is a global problem and GHG are largely global in nature, then producing more manufactured goods in the UK more efficiently than elsewhere would achieve more to tackle the issue than the current isolated and fragmented action.

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

EEF and UK Steel have consistently maintained that carbon leakage will initially manifest itself not through the relocation of industry (ie the closure of a UK plant and the opening of a new plant overseas to service the same market), but by the loss of market share to imports as UK competitiveness is gradually eroded. The loss to imports of the UK steel industry’s market share is shown in Table 1 above.

Another early manifestation of carbon leakage, for plants that are part of international groups, will be seen in decisions on where to invest for the future. If multinational groups find the investment environment in the UK more hostile than in other countries, they are likely to place their investments in countries where they expect to obtain the best returns. EEF has maintained for some time that the costliness, complexity and uncertainty of the UK’s energy and climate change policy scene is making the UK’s investment climate less welcoming to manufacturing.

Investment decisions are complex and take into account a multitude of different and often conflicting considerations. Energy and climate change policy is one factor among many. Clearly the more energy intensive an activity, the greater prominence this factor attains.

Decisions to close manufacturing facilities are similarly complex and are not taken lightly. They tend to occur either as a result of bankruptcy or because a judgement is reached that a facility is no longer able to make a reasonable return.

In the specific case of the steel industry:

1.The most critical climate change policy for the BF/BOS sector is the EU Emissions Trading System (EU ETS). With the free issuance of allowances in Phases 1 and 2, carbon leakage specifically caused by the EU ETS has not so far arisen. However, the sector across Europe will be seriously short of allowances in Phase 3. There is a very real risk that output will be reduced (and capacity cut back) as allowances run out towards the end of the decade.

2.The EAF sector is primarily affected by the impact of climate change policies on electricity prices. The combined effects of the renewables incentive schemes (primarily the Renewables Obligation), the pass-through of EU ETS carbon pricing in electricity prices and the Carbon Price Floor threaten seriously to erode UK competitiveness. It is the recognition of this risk that has led the government to announce a potential package of measures to assist energy intensive industries. We reserve judgement on whether this package will be adequate to meet our concerns.

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

Although EEF/UK Steel support a long-term development of consumption based emissions monitoring, it would be neither desirable, nor practical for the UK unilaterally to adopt targets based on a different currency from the rest of the world. Essential pre-conditions for a move to consumption-based targets are:

1.Global agreement on a robust methodology involving a scheme such as carbon content certificates (see above); and

2.An agreed recalibration of all countries’ targets onto a consumption basis.

One clear objection to a unilateral move to consumption based targets would be that the UK is unable to affect the carbon intensity of production processes in other countries. Adoption of consumption based targets could therefore have little tangible environmental outcome within other countries unless they led to some form of border measure (for example, by applying taxes related to carbon content). The UK however has no power to apply border measures (this is an EU prerogative).

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?

As previously stated, adoption of consumption based targets would require renegotiation of all internationally-agreed targets. It would be pointless otherwise.

It is possible that emerging economies such as China might support such a move, but it is likely that developed nations who are major importers of manufactured goods (eg the USA) would oppose the move. EEF is not able to assess whether a UK proposal to place targets onto a different currency would kick-start or over-complicate the stalled UNFCCC renegotiations.

October 2011

1 Davis S J and Calderia K (2010) Consumption-based accounting of CO2 emissions, PNAS
http://www.pnas.org/search?fulltext=Steven+Davis&submit=yes&go.x=14&go.y=4

Prepared 16th April 2012