Energy and Climate ChangeMemorandum submitted by the Public Interest Research Centre

About PIRC

The Public Interest Research Centre (PIRC) is an independent charity, whose work is aimed towards building a sustainable society. Through research and advocacy, we press for the structural changes needed to effectively tackle climate change and ecological degradation.

Declaration of Interests

Established in 1971, the Public Interest Research Centre is an independent charity (Registered No 266446). Our funding is provided by charitable foundations and individual donations. We do not receive any corporate or government funding.

Summary

UK emissions measured on a consumption basis have grown by 20% since 1990 (2008 figures)—in contrast to official territorial emissions reporting, which records that UK emissions have dropped by 14%. Our total emissions are set to grow further, despite anticipated cuts domestically.

In 2004, the UK evaded at least £4 billion of carbon clean-up costs thanks to this emissions loophole. Currently, the UK does not pay the full ecological costs for its consumption.

Methodologies for consumption-based emissions reporting are now robust enough for Defra to be already accounting in this way, and several governments have committed to consumption-based reporting.

Taking a consumption approach would be a more truthful, equitable and intelligent way of accounting for our emissions, ensuring the UK takes full responsibility for its impacts—but also helping protect the UK against carbon risk in our supply chains.

We know of no evidence that industry has relocated from the UK specifically as a result of climate policy, and consider this concern to have unfairly overshadowed the far bigger problem of emissions being outsourced due to wider trends in globalisation.

We feel the Committee on Climate Change should be tasked with recommending the most appropriate means of mitigating outsourced emissions, and whether this leads to revised carbon budgets, separate targets, or ancillary actions.

Taking a consumption approach could aid progress at the UN climate talks and inform negotiations on what agreement takes shape after Kyoto’s first commitment period expires.

Much more attention should be paid to demand-side mitigation measures.

Recommendations

Government should adopt consumption-based emissions reporting and publish figures annually alongside territorial emissions.

Government should mandate the Committee on Climate Change to investigate consumption-based emissions reporting and what additional targets or policies should be adopted to tackle outsourced emissions.

We suggest the Energy and Climate Change Committee seek oral evidence from the Committee on Climate Change to inform this inquiry.

Submission

1. Definition of terms used

In this submission, “consumption-based emissions reporting” refers to the practice of measuring a country’s total carbon emissions, including those emissions embedded in imports.

We occasionally use the phrases “outsourced emissions” and “embedded emissions” to refer to emissions embedded in UK imports (net of exports), and to signify that they remain the UK’s responsibility, despite having been effectively outsourced overseas.

2. Before proceeding, we wish to suggest that the inquiry’s questions set up a false dichotomy between production-based and consumption-based emissions reporting

Reporting on the UK’s consumption emissions does not need to mean getting rid of current territorial reporting methods or negotiating a change in international reporting requirements. Rather, consumption-based reporting should be a natural and complementary extension of existing practices—reflecting more accurately the UK’s true contribution to climate change and enabling more intelligent policy.

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

On a consumption basis, UK emissions rose 20% between 1990 and 2008.¹ This is in contrast to a 14% decline in territorial emissions over the same time period, as current official reporting methods record.²

Research by the Carbon Trust suggests the UK’s total emissions are set to rise still further. Their calculations show that, on a consumption basis, UK emissions stood at 844MtCO₂ in 2010. By 2025, total UK emissions will at best sum to 803MtCO₂, and in the worse case, are anticipated to increase to 908MtCO₂.³ This is forecast to occur even if legally-binding domestic emissions reduction targets are met. In other words, Britain’s contribution to global warming will remain almost constant, or even increase, if our consumption remains so carbon-dependent.

PIRC calculates that in 2004 the UK evaded at least £4 billion of carbon clean-up costs thanks to this emissions loophole.⁴ Currently, the UK does not pay the full ecological costs for its consumption. We are benefitting from natural carbon sinks and cheap manufacturing processes in other countries, but not paying the price for cleaning up the resulting pollution or repairing failing carbon sinks.

The Chancellor, George Osborne, has recently hinted that he does not think the UK should continue to lead the world in cutting emissions, given that “Britain makes up less than 2% of the world’s carbon emissions to China and America’s 40%.”⁵ A consumption perspective would show such complacency to be misplaced: Britain’s consumption patterns are helping boost Chinese emissions—from whom we import many carbon-intensive goods⁶—and our contribution to global emissions is increasing. Any attempt to “go slow” in reducing our emissions would be badly misplaced.

4. 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?

Yes—and in fact the UK Government already measures emissions on a consumption basis. Defra commissioned research from Stockholm Environment Institute in 2008 to look at the UK’s carbon emissions on a consumption basis for the years 1990–2004.⁷ Subsequent Defra-sponsored research has updated this through to 2008,⁸ and carried out structural decomposition analysis to break down the emissions profile by sector and product category.⁹ This data has been verified by the Office for National Statistics, is now included in the ONS Sustainable Development Indicators,¹⁰ and is displayed graphically on the Defra website.¹¹ However, DECC continue to publish only territorial emissions data on their website.¹² In our opinion, if statistics are robust enough for Defra and the ONS, they are robust enough for DECC to publish.

Going further, Defra have recently tendered a contract to Leeds University to carry out consumption-based emissions accounting for the UK for the next five years, covering the years 2009–13.¹³ However, at this stage it is unclear whether they will be published on the DECC website alongside territorial emissions, or treated as directly comparable “official statistics”. In our opinion, they should be.

Academics working in this field have continued to improve the robustness of the methodologies used, making great strides even in the past few years.¹⁴ Recent academic papers on the subject include studies by the Universities of Stanford,¹⁵ Oxford,¹⁶ and Surrey;¹⁷ by Stockholm Environment Institute;¹⁸ and by researchers collaborating between institutions.¹⁹ NGOs and think tanks who have produced analysis of outsourced emissions include Policy Exchange,²⁰ Green Alliance,²¹ WWF,²² and the New Economics Foundation.²³ If there are remaining weaknesses in measuring emissions on a consumption basis, the problem lies in data collection, not methodology: something that the Government might help address by providing support for greater international collaboration in data-sharing.

The robustness of the consumption-based approach is also attested to in the precedents set by other countries. In Scotland, the government is obliged under the Climate Change (Scotland) Act 2009 to “lay before the Scottish Parliament a report in respect of each year in the period 2010–50… set[ting] out the emissions of greenhouse gases (whether in Scotland or elsewhere) which are produced or otherwise associated with the consumption and use of goods and services in Scotland during that year.”²⁴ The Scottish Government has commissioned research into Scotland’s historic emissions from a consumption basis, and will update this in 2012.²⁵ The Welsh Government has also committed to reporting on Wales’ emissions on a consumption basis.²⁶ In Sweden, meanwhile, the Government’s Environmental Objectives Bill of March 2010 was introduced with the goal of “hand[ing] over to the next generation a society in which the major environmental problems in Sweden have been solved, and that this should be done without increasing environmental and health problems outside Sweden’s borders [emphasis added].” Since the passage of the Bill, Sweden has developed a series of environmental indicators which all take into account a consumption perspective, including greenhouse gas emissions.²⁷

Whatever remaining uncertainties may exist in measuring them, it is clear that the problem of outsourced emissions is too important to be ignored any longer. The Chief Scientific Advisors (CSA) at both DECC and Defra have signalled their concerns about emissions from consumption in the recent past. Prof Bob Watson, Defra CSA, confirmed in an interview in September 2010 that total UK emissions had risen and declared: “We’ve got to be more open about this”.²⁸ Prof David MacKay, DECC CSA, has similar concerns.²⁹ If Government still considers the methodologies for consumption-based reporting to be insufficiently robust, it should find the resource to improve them.

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

The key benefits of taking a consumption-based approach to emissions reporting include:

Giving a more truthful and accurate representation of the UK’s contribution to global emissions, and aiding decisions at a national and international level about how to fairly allocate the mitigation burden.

Enabling policy to be more informed and better targeted. Around 75% of a UK household’s carbon footprint is a result of the products and services we consume; yet DECC policy is focused overwhelmingly on the other 25% of direct emissions from the energy we use in our homes and transport.³⁰ A consumption perspective would help to broaden this focus and better align DECC’s work with that being undertaken in Defra and BIS.

Ensuring the UK remains a leader in climate policy, and is being honest in taking responsibility for its full environmental impact.

Protecting against carbon risk in UK supply chains. Even without progress at the UN climate talks, international moves towards carbon being priced appear inexorable and inevitable: in China, for example, clean energy policies mean a carbon price of £5/tCO₂ is already reflected in Chinese electricity costs. Understanding our consumption footprint will aid the UK in insulating itself against future price rises by moving towards lower-carbon, resource-efficient imports.

A potential key disadvantage of consumption-based emissions reporting would be if it gave the impression that climate policy to date has not been at all successful. This is not the case: it has simply been limited. UK emissions would have been still higher were it not for successes in domestic emissions cuts. Clear communication of this will be important, but pretending total emissions have not risen is no longer tenable.

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

We are not aware of any evidence of this occurring to date, despite this being alleged by various commentators and industry spokespeople in recent months—sometimes with the aim of discrediting all climate change legislation.³¹

It is important to differentiate between what is often termed “carbon leakage” and the far larger problem of outsourced emissions. Carbon leakage usually refers to emissions being driven overseas as a direct consequence of stringent climate change policies, where businesses seek to avoid the additional cost of abating emissions by moving their operations to a lower-compliance regime. Research by the Carbon Trust shows that this could affect only a very small number of sectors and a tiny percentage of UK emissions: it is calculated that implementing the current EU Emissions Trading System (EU ETS) Phase III targets to 2020 without any free allocation of allowances or protection would drive less than 2% of emissions abroad.³²

We accept that certain strategic energy-intensive sectors – such as steel, aluminium and cement manufacture – could be affected disproportionately by climate policies. It would be ironic and detrimental to the building of a green economy if industries dedicated to the manufacture of wind turbines or electric cars, for example, were driven overseas or discouraged from locating themselves in the UK. However, we would urge caution that the Government not overreact to such fears and cave into what may, in some cases, simply be specious pleading by industry. Research suggests that too many industrial sectors are already likely to benefit from compensatory free allowances under Phase III of the EU ETS.³³ We urge the Government to consult publicly on its awaited package of measures for energy-intensive industries before it subsidises them from the public purse.³⁴

Moreover, we are concerned that concerted lobbying on this relatively small matter risks obscuring—and confusing—the far larger problem of UK emissions being outsourced overseas regardless of the shape of existing British climate policy. The quickest glance at data on outsourced emissions over the last 20 years shows that this process has not been driven by climate policy to date, but rather is a long-established negative trend driven by globalisation and the flight of capital and labour from UK industry to predominantly Asian countries. Environmental legislation plays only a small part in determining overall costs for most businesses, whereas labour costs tend to be far more important.

Indeed, progressive business in the UK would seem to prefer tougher action on outsourced emissions, rather than a dilution of existing climate policy. For example, the UK Corporate Leaders’ Group on Climate Change recently called on Government to mandate an enquiry into outsourced emissions by the Committee on Climate Change;³⁵ whilst the Aldersgate Group have called for “more transparency about the UK's carbon footprint… UK demand for imported goods is responsible for more GHG emissions abroad than any other European country, and is third worldwide, behind only the US and Japan. This does not justify weakening climate change policy. It does, however, put greater responsibility on an increasingly service-based economy to help developing countries reduce their GHG emissions.”³⁶

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

We feel that it should be for the Committee on Climate Change (CCC) to consider whether UK climate policies should be strengthened to take account of rising emissions from consumption. One can envisage this leading to a variety of approaches, some more practicable than others:

Existing UK emissions targets could be recalculated to incorporate consumption emissions. Whilst this would be the simplest solution and be more comprehensive and equitable than the current targets, the new targets would of course be more challenging to meet, reflecting the UK’s reduced jurisdiction over (if not culpability for) emissions originating overseas.

An alternative approach would be to ignore trying to reduce outsourced emissions directly, but rather take compensatory action domestically, by tightening up existing carbon budgets.

Government could adopt a separate target, outside the existing carbon budgets, to influence reductions in outsourced emissions. It would enshrine a commitment to reducing the UK’s total carbon footprint, not just our territorial emissions, and lend greater impetus to demand-side measures seeking to shift consumption patterns in the UK.

A consumption-based approach to emissions could inform international negotiations going forward beyond Durban, such as through the brokering of a second commitment period for the Kyoto Protocol, bilateral deals, or trade talks incorporating carbon border adjustment mechanisms.

Even if not used to set new targets, a consumption approach could be adopted as a “shadow” accounting system for appraising policy against, to ensure that domestic action does not result in perverse outcomes (eg increasing use of imported biofuels because of lower tailpipe emissions, but boosting emissions overseas through deforestation).

8. 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?

It should be made clear that there is no need to renegotiate the entire UN emissions reporting process for a parallel set of consumption emissions accounts to be assembled. This would clearly take time and delay an already vexed set of negotiations.

However, were the UK to begin reporting its emissions on a consumption basis (in common with Sweden, Scotland, Wales and other early-adopters), this could in fact start to untangle the UNFCCC deadlock. China’s reluctance to adopt tougher emissions policies in part stems from feeling blamed for emissions that ultimately fuel Western consumption patterns. As China’s Foreign Ministry spokesman Qin Gang has said: “The developed countries move a lot of manufacturing industry into China. A lot of the things you wear, you use, you eat are produced in China. On the one hand, you shall increase the production in China, on the other hand you criticize China on the emission reduction issue.”³⁷ Officially acknowledging this to be the case could build trust and ease negotiations.

Furthermore, a consumption approach should inform negotiations on what international agreement takes shape after Kyoto’s first commitment period expires. The Kyoto Protocol as it stands was designed at a time when international flows of carbon were much smaller: emissions embedded in trade have grown from 4.3 GtCO₂ in 1990 to 7.8 GtCO₂ in 2008.³⁸ Moreover, the net emissions transfers via international trade from developing to developed countries increased from 0.4 GtCO₂ in 1990 to 1.6 GtCO₂ in 2008, exceeding emissions reductions under the Kyoto Protocol.³⁹ Much debate under the UNFCCC concerns the West’s historical responsibility for emissions, but a consumption approach shows that Western contributions to climate change continue to be disproportionate.

Indeed, if COP-17 at Durban fails to deliver a fair, ambitious and legally-binding climate treaty, a consumption approach might prove useful in rebuilding climate policy architecture subsequently. For example, it could inform bottom-up bilateral climate deals between willing nations or blocs (eg EU-China), in which carbon flows embedded in trade between the two regions are explicitly addressed through border adjustment measures. Compared to a global deal, this is clearly a “plan B”; but it is also far preferable to no action at all post-2012.

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

The biggest obstacle to consumption-based emissions reporting being adopted officially in the UK is no longer uncertainty in accounting methodologies; it is the Government’s fear that they will lose face for having presided over a rise in carbon pollution, and that there is little they can do to reduce outsourced emissions.

But this is simply not the case. There are multiple policy options for cutting the emissions we currently outsource, but the impetus to pursue them is not yet there. We may not have direct jurisdiction over emissions from Chinese factories, but our consumption choices clearly influence what is produced on our behalf.

Adopting a serious commitment to tackling our total carbon footprint would, for example, open out options for demand-side measures to alter consumption patterns—a large policy area currently being given much less attention than supply-side mitigation efforts (such as greener electricity production or more fuel-efficient cars). This could range from work already begun by Defra to reduce food waste, through to incentivising the purchase of products with longer lifetimes,⁴⁰ and encouraging dietary change. As research by WRAP has shown, many of these options offer larger emissions savings than supply-side measures alone, and will help reduce emissions wherever in the world they occur.⁴¹

October 2011

References

¹ Stockholm Environment Institute, Development of an Embedded Emissions Indicator, report for Defra, July 2008 (for 1990-2004 data) and 2011 update (for 2004-2008 data), viewable here:
http://www.defra.gov.uk/statistics/environment/green-economy/scptb01-ems/

² UK Greenhouse Gas Inventory, 1990-2008, http://ghgi.decc.gov.uk/

³ Carbon Trust, International Carbon Flows, May 2011,
http://www.carbontrust.co.uk/policy-legislation/international-carbon-flows/pages/default.aspx

⁴ The figure of at least £4 billion was arrived at through the following calculation. Net emissions flows into the UK from non-EU Annex I countries & non-Annex I countries totalled 186MtCO₂ in 2004 (Carbon Trust, International Carbon Flows, ibid). This excludes net carbon flows from EU countries as they are assumed to have an inbuilt carbon price, owing to the EU ETS and EU climate targets. DECC’s low figure for the price of carbon in the non-traded sector for 2008, the earliest year available, is £25/tCO₂
(http://www.decc.gov.uk/en/content/cms/emissions/valuation/valuation.aspx). We chose this low figure to reflect the uncertainty in costing mitigation efforts in multiple overseas locations, but consider it to be a conservative estimate. 186MtCO₂ x £25/tCO₂ = £4.6 billion.

⁵ Chancellor of the Exchequer, George Osborne, speech to Conservative Party Conference, 3 October 2011. Viewable online at http://www.bbc.co.uk/news/uk-politics-15152909

⁶ The emissions embedded in goods imported to the UK from China in 2004 totalled some 64MtCO₂, a higher figure than for any other country from which the UK imports goods. See Carbon Trust, International Carbon Flows, May 2011, ibid.

⁷ Stockholm Environment Institute, Development of an Embedded Emissions Indicator, report for Defra, July 2008.

⁸ The full breakdown of these updated figures has not yet been released, but is viewable on the Defra website, http://www.defra.gov.uk/statistics/environment/green-economy/scptb01-ems/

⁹ Minx, J, Baiocchi, G, Wiedmann, T, and Barrett, J (2009), Understanding changes in UK CO₂ Emissions from Consumption, 1992–2004: A Structural Decomposition Approach. Report to Defra by Stockholm Environment Institute at the University of York and the University of Durham. See also Barrett, J, Owen, A, Sakai, M (2011) UK Consumption Emissions by Sector and Origin. Report to Defra by University of Leeds.

¹⁰ Defra and ONS, Measuring Progress: Sustainable development indicators 2010, p 15.

¹¹ See Defra website,
http://www.defra.gov.uk/statistics/environment/green-economy/scptb01-ems/

¹² See DECC website,
http://www.decc.gov.uk/en/content/cms/statistics/climate_stats/gg_emissions/uk_emissions/uk_emissions.aspx. PIRC contacted DECC Climate Change Statistics in July 2011 to enquire whether the department would consider publishing the data commissioned by Defra and verified by the ONS, and were told: “We are reviewing the content of the DECC climate change statistics webpages over the next month and we will consider making your suggested amendments. I apologise I cannot give you a firm decision on any action at this stage.” As of October 2011, nothing on the DECC website has changed.

¹³ Defra research project ET0101, “Embedded Carbon Emissions Indicator”, http://bit.ly/nhvexA

¹⁴ Confirmed by PIRC through various personal conversations with researchers at the Universities of Leeds and Surrey, June - October 2011.

¹⁵ Steven J Davis and Ken Caldeira, Carnegie Insitution for Science (Stanford University), “Consumption-based accounting of CO₂ emissions”, Proceedings of National Academy of Sciences, vol 107, no 12, March 2010.

¹⁶ Dieter Helm, Oxford University, Too Good to Be True? The UK’s Climate Change Record, December 2007.

¹⁷ Angela Druckman and Tim Jackson, University of Surrey, “The carbon footprint of UK households 1990-2004: A socio-economically disaggregated, quasi-multi-regional input-output model”, Ecological Economics 68, 2009, pp 2066–2077.

¹⁸ Stockholm Environment Institute, Development of an Embedded Emissions Indicator, report for Defra, July 2008.

¹⁹ For example, Glen Peters, Jan Minx et al, “Growth in emission transfers via international trade from 1990 to 2008Q”, Proceedings of the National Academy of Sciences, vol 108 no 21, pp 8903–8908, March 2011.

²⁰ Andrew Brinkley & Simon Less, Policy Exchange, Carbon Omissions: consumption-based accounting for international carbon emissions, October 2010.

²¹ Green Alliance, A Pathway to Greener Products: Recommendations from Green Alliance’s Designing Out Waste Consortium, September 2010.

²² WWF and Stockholm Environment Institute, Counting Consumption: CO₂ emissions, material flows and Ecological Footprint of the UK by region and devolved country, 2006.

²³ New Economics Foundation, Chinadependence: The 2nd UK interdependence report, 2007.
http://www.neweconomics.org/publications/chinadependence.

²⁴ Climate Change (Scotland) Act 2009, para 37, pp 21–22; see also
http://www.scotland.gov.uk/Topics/Environment/climatechange/scotlands-action/climatechangeact/reporting

²⁵ Scottish Government, “Production of a time series of Scotland’s Ecological and Greenhouse Gas Footprints”, 2009, and PIRC correspondence with Daniel Hinze, Senior Economist in the Environmental Analysis Unit, Scottish Government, August 2011.

²⁶ Welsh Government, Climate Change Strategy for Wales, October 2010, p 40.
http://wales.gov.uk/docs/desh/publications/101006ccstratfinalen.pdf

²⁷ Swedish Environmental Protection Agency, The Climate Impacts of Swedish Consumption, January 2010; Swedish Consumption and the Global Environment, 2011.

²⁸ Press Association, “UK urged to be more open about greenhouse gas emissions”, 3 September 2010, http://www.guardian.co.uk/environment/2010/sep/03/uk-greenhouse-gas-emissions-bob-watson

²⁹ See interview with David MacKay by Roger Harrabin, “Britons creating ‘more emissions’”, BBC News website, 30 September 2009, http://news.bbc.co.uk/1/hi/sci/tech/8283909.stm

³⁰ Green Alliance, A Pathway to Greener Products: Recommendations from Green Alliance’s Designing Out Waste Consortium, Sept 2010, p 7.

³¹ For example, Matthew Sinclair of the TaxPayers’ Alliance argues in his recent book Let Them Eat Carbon (Sept 2011) that “the problem of exporting emissions is likely to mount in the coming years as climate change policies really bite and a higher carbon price drives high emitting industries abroad. That calls into question the whole point of the ambitious unilateral targets and caps that developed countries are putting on their emissions.” (p 197). Sinclair is right to draw attention to the problem, but his diagnosis is flawed, and his proposed remedy plain wrong.

³² Carbon Trust, Tackling carbon leakage: sector-specific solutions for a world of unequal carbon prices, March 2010.

³³ Grantham Institute—Imperial College London, London School of Economics, & Carlos III University in Madrid, “Policy brief: Still time to reclaim the European Union Emissions Trading System for the European tax payer”, May 2010,
http://cep.lse.ac.uk/pubs/download/pa010.pdf

³⁴ The Government has stated it will announce such a package of measures in Autumn 2011—see for example HM Government, Enabling the Transition to a Green Economy: Government and business working together, August 2011.

³⁵ UK Corporate Leaders’ Group on Climate Change, Seize the Day, June 2010.

³⁶ Aldersgate Group, submission to Environmental Audit Committee inquiry into carbon budgets, 3 June 2011, available online at
http://www.publications.parliament.uk/pa/cm201012/cmselect/cmenvaud/1080/1080vw07.htm

³⁷ Associated Press, “China rejects criticism of its carbon emissions”, The New York Times, 21 June 2007, http://www.nytimes.com/2007/06/21/business/worldbusiness/21iht-emit.4.6262722.html

³⁸ Peters, G et al, “Growth in emission transfers via international trade from 1990 to 2008”, Proceedings of the National Academy of Sciences, vol 108 no 21, pp 8903–8908, March 2011.

³⁹ Peters, G, 2011, ibid.

⁴⁰ See for example research commissioned by Defra from ERM, Longer Product Lifetimes, February 2011.

⁴¹ WRAP, Meeting the UK climate change challenge: The contribution of resource efficiency, 2009. WRAP Project EVA128. Report prepared by Stockholm Environment Institute and University of Durham Business School.