Energy and Climate Change Committee Consumption‐Based Emissions Reporting

Ref Organisation Page

CON 01 Defra, DECC and BIS 3 CON 02 Food Ethics Council 14 CON 03 Professor C.N. Hewitt 18 CON 04 Small World Consulting Ltd 19 CON 05 West Sussex Environment and Climate Change Board 23 CON 06 Lake District National Park Authority 25 CON 07 The Packaging Federation 30 CON 08 Tata Steel 33 CON 09 Dr Rupert Read 38 CON 10 West Sussex Environment and Climate Change Board 40 CON 11 Mineral Products Association 44 CON 12 E.H.Booth & Co Ltd 50 CON 13 Green House Think Tank 53 CON 14 British Ceramics Confederation 60 University of Surrey, Centre for Environmental CON 15 63 Strategy CON 16 Stirling Management school 70 CON 17 WWF‐UK 76 CON 18 EEF/UK Steel 83 CON 19 The Carbon Trust 88 CON 20 UK Energy Research Centre 92 CON 21 Centre for Alternative Technology (CAT) 110 CON 22 Manchester City Council 115 CON 23 Best Foot Forward 117 CON 24 Construction Products Association 133 CON 25 Public Interest Research Centre (PIRC) 135

Ref Organisation Page

CON 26 EDF Energy 145 CON 27 Grantham Research Institute 150 Tyndall Manchester, Sustainable Consumption CON 28 157 Institute and Stockholm Environment Institute CON 29 InterfaceFLOR 178 CON 30 Aldersgate Group 180

Memorandum submitted by Defra, DECC and BIS (CON 01)

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.

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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).

Page 4 Figure 2: Top 15 overseas contributors to 2004 UK consumption emissions total 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.

90,000

80,000

70,000

60,000

(kt) 50,000

40,000 CO2e 30,000

20,000

10,000

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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.

Page 5 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 – 2016. 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 i.e. 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.

Page 6 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 (e.g. 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:

Page 7 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 (e.g. 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 (i.e. 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 (e.g. Climate Strategies10,11, Oko Institute12) points to a limited number of sectors being at significant risk of carbon leakage; those that appear consistently are iron & 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 EU13. 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 analysis14 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.

Page 8 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 (e.g. through bilateral agreements and trade and development policy).

Page 9 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.

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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?

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October 2011

Page 11 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.

Page 12 13. DECC (2010). Assessment of the degree of carbon leakage in light of an international agreement on climate change A report by Cambridge Econometrics, Climate Strategies and Entec UK for the Department of Energy and Climate Change, 19 August 2010.

14. E.g. 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.

Page 13 Memorandum submitted by the Food Ethics Council (CON 02)

1. The Food Ethics Council (FEC) is a charity that provides independent advice on the ethics of food and farming. The 15 members of the FEC are leaders in their relevant fields, and appointed as individuals. They bring a range of expertise to our work, from academic research through to practical knowledge of farming, business and policy.

2. With WWF‐UK, the FEC has produced three papers exploring policy opportunities to enable sustainable food consumption.1 In particular, the papers have contributed to debate over the role of changes in meat consumption in mitigating climate change. This work has facilitated a constructive conversation about this emotive issue among farming organisations, environmental groups and policy makers, underpinned by analysis of the potential environmental, animal welfare, economic and social impact of a wide range of possible policy interventions. This response draws on that work.

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

3. Defra reports that, across the economy as a whole, a 20% rise in UK consumption‐ related emissions since 1990 has outstripped reductions in emissions from domestic production.2

4. Globally, emissions associated with production have been falling in rich countries committed to reporting and to making reductions under the UN Framework Convention on Climate Change (UNFCCC; these countries are known as Annex B countries). However, increases in consumption within those countries, met mainly by imports from China, India and Brazil, have contributed to an overall increase in global emissions.3

5. Agriculture is estimated to account directly for around 10‐12% of global greenhouse gas emissions, rising significantly, by some models up to 32%, if the effects of agriculture‐ related land use change and food supply chains are also included.4 In the UK, agriculture and food chain emissions are estimated to account for between 20% and 30% of total emissions by consumption, with the larger figures including emissions associated with land‐use change overseas.5 Agricultural and food chain emissions do not appear to account for a large share of the overall transfer from Annex B to non‐Annex B countries.6

6. Nevertheless, ‘off‐shoring’ appears to be an issue in the UK food chain, where a quarter of emissions currently derive from net imports.7 Since methods of accounting for soil carbon loss and emissions from land use change remain in development, estimates of food chain emissions should be treated with caution. However, a growing UK agricultural trade deficit since 1990,8 and high overseas rates of land use change for food and feed production point in the towards significant off‐shoring.

Page 14 What are the benefits and disadvantages associated with taking a consumption‐based rather than a production‐based approach to greenhouse gas emissions accounting?

7. We consider that there are considerable advantages to taking a consumption‐based approach to greenhouse gas emissions accounting, but would see this as an adjunct to production‐based approaches, rather than as an alternative.

8. A consumption‐based approach provides a basis for addressing the massive net transfer of emissions from Annex B to non‐Annex B countries, which has so far frustrated efforts to reduce overall global emissions. In seeking to close this loophole, it will be crucial to respect the UNFCCC principle that countries should mitigate emissions based on “equity and in accordance with their common but differentiated responsibilities and respective capabilities”.9 Combining production‐ and consumption‐based approaches appears to provide a fairer and more realistic basis for doing so than the alternative, which is to impose strict production‐based emissions reduction targets on non‐Annex B countries.

9. Within the food chain, models of the potential for technical abatement of greenhouse gas emissions, for example through improvement in production efficiency, will not be sufficient to ensure that agriculture plays a proportionate part in meeting the UK’s target to reduce emissions 80% by 2050. Looking beyond the 2020 target, changes in diet towards less greenhouse gas‐intensive foods are also likely to be necessary, implying changes in consumer behaviour. So there is a case for consumer behaviour change from production‐based analytical perspective. However, consumption‐based accounting provides a stronger and more direct rationale for consumer behaviour change. Consuming less greenhouse gas‐intensive diets evidently provides a mechanism for the UK to lower its overall contribution to global emissions, yet the incentives for UK policy to achieve these reductions is diminished if the sole accounting system is production‐based and a significant share of the benefits accrue ‘off book’, in other countries.

10. The farming sector has been wary of consumption‐based approaches greenhouse gas accounting and mitigation, as these have often taken the form of public campaigns for consumers to eat less meat – a product that many farmers rely on selling for a livelihood. However, our analysis suggests that the farming sector has an economic interest in supporting a greater policy focus on consumption‐based accounting, and our experience shows that farming industry bodies are willing to recognise that.

11. The farming sector’s economic interest in supporting consumption‐based approaches to greenhouse gas emissions accounting relates to their long‐standing concern that the UK’s leadership across areas of policy including climate change and animal welfare burdens UK producers with additional costs, drives UK retailers to source from overseas, and simply off‐shores the problems UK policies were intended to address. This problem is invisible within a production‐based approach to greenhouse gas accounting, which would register progress against the UK’s emissions targets if consumption remain unchanged and UK farmers were simply reducing production and losing business to overseas competitors. The UK farming industry has also been keen to point to the UK’s potential environmental comparative advantage in certain forms of agricultural

Page 15 production, and farming organisations have recognised that these advantages can only be recognised and incentivised through consumption‐based approaches to accounting.

12. It has proved easier for farming organisations to endorse a consumption‐based approach to greenhouse gas accounting than a consumption approach to mitigation (i.e. consumer behaviour change). Farmers have shown a preference for mitigation measures that are within their control as producers, especially where they are likely to yield cost savings. However, we have found producer organisations will to recognise that:

(a) some production‐based mitigation measures will save farmers money while others will carry a net cost, as illustrated by marginal abatement cost curves for agriculture;10

(b) likewise, it is possible to envisage consumption‐based mitigation strategies that either benefit or harm the sector’s profitability; and

(c) that it therefore makes sense for producers to engage in efforts to develop consumption‐based greenhouse gas mitigation strategies that contribute to the overall environmental, social and economic sustainability of their sector, rather than assuming initiatives to promote more sustainable consumer behaviour are necessarily a threat to their industry.

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

13. For the reasons outlined above, we consider that it is very desirable for the UK to adopt emissions accounting, and reduction targets on a consumption basis. This should be as well as, not instead of, production‐based targets.

14. We are not well‐placed to comment on the practicality of such an approach. However, we suggest that the benefits are sufficiently significant that it would have to be immensely impractical for there to be any justification not to proceed in this way.

October 2011

1 MacMillan, T. & Durrant, R. (2009) Livestock consumption and climate change: a framework for dialogue. Food Ethics Council and WWF‐UK. http://www.foodethicscouncil.org/livestockconsumption MacMillan, T. and Middleton, J. (2010) Livestock consumption and climate change: progress and priorities. Food Ethics Council and WWF‐UK. http://www.foodethicscouncil.org/node/585 WWF‐UK and Food Ethics Council (2011) A square meal: how encouraging greener eating fits the UK government’s ambitions for the environment, farming and the Big Society. WWF‐UK and FEC. http://www.wwf.org/squaremeal

2 Defra (2011) Greenhouse gas emissions relating to UK consumption. http://www.defra.gov.uk/statistics/environment/green‐economy/scptb01‐ems/.

3 Peters. G., Minx, J., Weber, C. & Edenhofer, O. (2011) Growth in emission transfers via international trade from 1990 to 2008. PNAS, http://www.pnas.org/cgi/doi/10.1073/pnas.1006388108

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4 Garnett, T. (2008) Cooking up a storm: food, greenhouse gas emissions, and our changing climate. Food Climate Research Network, Guildford. http://www.fcrn.org.uk/sites/default/files/CuaS_web.pdf

5 Audsley, E., Brander, M., Chatterton, J., Murphy‐Bokern, D., Webster, C., and Williams, A. (2009) How low can we go? An assessment of greenhouse gas emissions from the UK food system and the scope to reduce them by 2050. WWF‐UK. http://www.fcrn.org.uk/fcrn/publications/how‐low‐can‐we‐ go

6 Peters. G., Minx, J., Weber, C. & Edenhofer, O. (2011) Growth in emission transfers via international trade from 1990 to 2008. PNAS, http://www.pnas.org/cgi/doi/10.1073/pnas.1006388108: figure 5.

7 Defra (2010) Food statistics pocketbook. Defra, London. http://www.defra.gov.uk/statistics/files/defra‐stats‐foodfarm‐food‐pocketbook‐2010.pdf

8 Defra (2010) Food statistics pocketbook. Defra, London. http://www.defra.gov.uk/statistics/files/defra‐stats‐foodfarm‐food‐pocketbook‐2010.pdf

9 UNFCCC (1997) The Kyoto protocol to the United Nations Convention on Climate Change. http://unfcc.int/resource/docs/convkp/kpeng.pdf. Cited in Peters. G., Minx, J., Weber, C. & Edenhofer, O. (2011) Growth in emission transfers via international trade from 1990 to 2008. PNAS, http://www.pnas.org/cgi/doi/10.1073/pnas.1006388108

10 Committee on Climate Change (2010) The fourth carbon budget: reducing emissions through the 2020s. Committee on Climate Change, London. http://downloads.theccc.org.uk.s3.amazonaws.com/4th%20Budget/CCC‐4th‐Budget‐Book_with‐hypers.pdf.

Page 17 Memorandum submitted by Professor C.N. Hewitt (CON 03)

Professor C.N. Hewitt, Lancaster Environment Centre, Lancaster University Evidence submitted in a personal capacity and not on behalf of Lancaster University

Executive summary 1. The greenhouse gases embodied in goods and services imported to the UK from abroad are very considerable and quantifiable. Hence the UK’s greenhouse gas emissions, when measured on a consumption basis, are significantly greater than when measured on a production basis.

2. The omission from UK greenhouse gas emissions reporting of greenhouse gases embodied in goods and services imported to the UK from abroad distorts current assessments of the UK’s “carbon footprint”.

3. It is practicable to adopt consumption‐based emissions reporting for greenhouse gases using currently‐available techniques and data.

4. The rapid development of an international space‐borne Earth observation capability for the verification of greenhouse gas emissions at the national scale is essential.

How do assessments of the UK’s greenhouse gas emissions differ when measured on a consumption rather than a production basis? 4. There is a large body of published evidence, including my own (The effect of trade between China and the UK on national and global carbon dioxide emissions, Y. Li and C.N. Hewitt, Energy Policy, 36, 1907 – 1914, 2008) that indicates that current production‐based greenhouse gas emissions estimates for the UK are significantly lower than consumption‐based estimates that take account of emissions embodied in net imported goods and services.

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? 5. Techniques of environmental input‐output analysis and the requisite data are available to allow robust estimation of consumption‐based emissions. Enhancements to the transparency of, and ease of access to, international trade data would be beneficial.

6. The rapid development of a space‐borne Earth observation capability for the verification of greenhouse gas emissions at the national scale is essential.

October 2011

Page 18

Memorandum submitted by Small World Consulting Ltd. (CON 04)

Executive Summary

1. Small World Consulting has a sophisticated understanding of the issues pertaining to this inquiry, based on a wealth of experience of developing and using consumption-based greenhouse gas metrics.

2. The greenhouse gas emissions embodied in international trade are highly significant and are not covered by current production-based carbon metrics. Their omission creates a seriously distorted perspective and perverse incentive for harmful policy measures.

3. The adoption of consumption-based carbon metrics is practical. By using well established techniques and existing data sets the resources required will be modest. Further improvements will also be possible and practical over time.

4. There is growing awareness among local governments, businesses and the public of the need for the UK to adopt consumption-based metrics.

5. The benefits include: • dramatically improved ability to track the UK’s progress towards a low carbon economy; • significantly improved information to guide national policy; • Encouraging and enabling local governments, businesses and others to develop consumption- based metrics and budgets and relate these to national context. • making visible the environmental case for increased UK procurement of many goods and services, with potential benefits for the UK economy

All of the above will better enable the UK’s movement towards an efficient, resilient and low carbon economy.

6. Adopting a robust yet practical approach will entail being transparent over the relatively high uncertainty that is inherent in consumption-based metrics.

7. Production-based metrics will still have their place alongside consumption-based measures.

Our experience of consumption­based greenhouse gas accounting

8. Small World Consulting has a wealth of experience in delivering consumption-based greenhouse gas metrics to organisations and helping them use this to develop value-adding carbon mitigation measures. It is clear from our work with diverse organisations that consumption-based greenhouse gas metrics are a) practical, b) increasingly widely seen to be important and c) are an essential metric for informing climate change strategy. 9. Organisations we have delivered consumption-based greenhouse gas metrics for include Manchester City Council (the ‘total footprint’ of residents and industry in Greater Manchester), West Sussex County Council (the ‘total footprint’ of residents, industry and the County Council itself), the Lake District National Park Authority (residents and visitors), E.H Booths (The footprint of operations and foods for this supermarket chain), Taylor Wimpey (operations and supply chains for this major UK house builder), The National Trust, the London Science Museum (the footprint of an Exhibition project), over 100 SMEs. With most of these organisations we are engaged in the development of carbon mitigation strategy. We have also delivered household consumption-based metrics for several community climate challenge projects, and developed the numbers behind such online calculators as My 1010, ‘Show me the Carbon’ (Eden Project), and the Guardian on-line. We conduct research with Lancaster University and independently into consumption-based greenhouse gas metric

Page 19

methodologies and their practical application. We therefore have a sophisticated understanding of the issues pertaining to this inquiry.

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

10. Current production-based carbon metrics do not take account of net emissions embodied in international trade. This is highly significant, especially since the trend in the UK has been to import an increasing proportion of goods that have high embodied energy and carbon.

11. Very often when we import goods rather than producing them in the UK, we not only remove the embodied carbon from the UK’s production-based carbon account, but we also increase the total level of global emissions. This is because we often import from countries that have significantly more carbon intensive energy and significantly less energy efficient industries. To give one simple illustration of how this comes about, Chinese primary energy has roughly three times the carbon per monetary unit as UK primary energy (coal being both a cheaper and a more carbon-intensive form of energy than oil, gas, nuclear or renewable energy).

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?

12. It is considerably more difficult to make accurate estimates of carbon on a consumption basis than on a production basis. It will be important to be clear about the inherent uncertainties involved in consumption-based metrics. However, the uncertainty is more than compensated for by the improved relevance of the measure as a surrogate for UK climate change impacts.

13. Adequate techniques and data exist to make it both realistic and very practical to create usable consumption-based metrics. Several models already exist, (including one developed by Small World Consulting with Lancaster University, based upon UK government statistics)i. Despite small methodological differences, each of these models offers a dramatically better surrogate measure of the climate change impact of the UK economy and society than can be achieved through production- based measures.

14. The central technique of environmentally extended input-output analysis that is used for this is well established. At its simplest, even using only UK data and applying the basic approximation that the global economy has the same structure as the UK economy, it is possible to generate a dramatically more realistic assessment of the climate change impact of UK activities and policy options than can be achieved through purely production-based carbon metrics.

15. It is also possible to do much better than this. Credible models already exist that use international data sets to quantify international carbon flowsii. Various projects are underway to develop this work further and these will be even better able to reflect the impacts of net imports from different countries and regions.

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

16. Consumption-based carbon metrics, even based only on UK data, provide a dramatically better surrogate measure of the climate change impact of activities on every scale, from the individual and business unit to the UK as a whole.

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17. Small World Consulting has first hand evidence that this is increasingly understood by a people, by businesses and by local governments.

18. As evidence of local government understanding of the importance of consumption-based metrics, Small World Consulting has been commissioned to provide consumption-based carbon metrics for Manchester City Council (covering Greater Manchester residents and industry), by West Sussex County Council (covering residents, industry and, within that, the council itself), and by the Lake District National Park Authority (covering residents and visitors)iii. These metrics have led to or are leading to the adoption of consumption-based local carbon budgets and these in turn contribute to the UK’s efforts to build an efficient, resilient and low carbon economy.

19. Increasingly widespread understanding among businesses of the importance of a consumption-based approach is reflected, for example, in our corporate work, including for Booths Supermarkets, Taylor Wimpey Plc and many others. Our client base represents only a small part of the momentum gathering throughout UK industry for consumption-based metrics. For many businesses, the vast majority of emissions are embedded in their supply chains, and their inclusion in carbon analysis dramatically open up the scope for mitigation action, including supply chain management, sustainable procurement and resource efficiency.

20. At an individual level, the public has an instinctive understanding of the need to attribute indirect carbon to activities, items and lifestyles. One strand of evidence for this has come to me personally through the ample feedback on my book “How Bad Are Bananas? The Carbon Footprint of Everything”iv, and through numerous public speaking events. It is clear from this that the concept of consumption-based accounting is almost universally accepted. In fact it is instinctive to include both direct and embodied emissions when considering carbon footprints. Three examples of the many organisations that actively reinforce this perspective are the Eden Project, the Guardian and 10:10v. It is also clear that the inadequacies of the UK’s production-based carbon account as a measure of the UK’s climate change impact are increasingly popularly understood.

21. As the UK takes increasing steps to reduce its carbon emissions, production-based metrics, used on their own, will provide an increasingly perverse incentive to off-shore our impacts and in doing so, we both hide them and often multiply them.

22. There is a strong environmental case for more local sourcing of many goods and services, compared to existing importing arrangements. Consumption-based metrics make this case visible and make the environmental case for increased UK sourcing easier to defend. This has potential to bring significant benefits for the UK economy.

23. UK consumption-based metrics will help to provide a coherent framework into which businesses, local government and others can position their own emerging consumption-based carbon metrics. Even individuals will be better placed to understand how their lives fit into the national and global picture. The adoption of national consumption-based metrics will, therefore, assist carbon literacy and carbon management at every scale.

24. Production-based metrics are still useful for some purposes and it will be useful to continue these alongside production-based approaches.

October 2011

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i Other examples include those developed by Tim Jackson at the University of Surrey and by the Stockholm Environment Institute. ii “The Supply Chain of CO2 Emissions”, 2011, Steven J. Davis, Glen P. Peters, Ken Caldeira, Proceedings of the National Academy of Sciences (PNAS), http://supplychainco2.stanford.edu/

The study was conducted by researchers at the Department of Global Ecology, Carnegie Institution of Washington, Stanford, USA and the Center for International Climate and Environmental Research – Oslo (CICERO).

Contact: Glen P. Peters, Center for International Climate and Environmental Research – Oslo (CICERO), Norway; Mobile: +47 9289 1638, E-mail:

Also: Carbon Trust: Global Flows http://www.carbontrust.co.uk/policy-legislation/international-carbon-flows/global- flows/Pages/global-flows.aspx

Also “Growth in emission transfers via international trade from 1990 to 2008”, 2011, Glen P. Peters, Jan C Minx, Christopher L. Weber and Ottmar Edenhofer, PNAS early edition. www.pnas.org/cgi/10.1073/pnas.10063888108 iii A Carbon Budget for the Lake District National Park, 2010, Lake District National Park Authority http://www.lakedistrict.gov.uk/a_carbon_budget_for_the_ldnp_v2.pdf iv Available and reviewed at, for example, http://www.amazon.co.uk/How-Bad-Are-Bananas-everything/dp/1846688914 v As part of their message, these organisations all have on-line tools that promote consumption based accounting for individuals: Eden Project http://www.edenproject.com/whats-it-all-about/climate-and-environment/show-me-the-carbon.php The Guardian http://www.guardian.co.uk/environment/interactive/2009/oct/20/guardian-quick-carbon-calculator 10:10: http://www.1010global.org/uk/people/carboncalculator

Page 22 Memorandum submitted by the West Sussex Environment and Climate Change Board (CON 05)

1. Executive Summary

1.1 In this response to the Committee's call for written evidence, the West Sussex Environment and Climate Change Board (ECCB) makes the following points:

1.1.1 The ECCB partnership has developed one of the first consumption-based local carbon budgets at the County level.

1.1.2 Emissions are greater when measured using a consumption-based approach rather than a production-based approach. The consumption-based carbon footprint of West Sussex residents is almost double that suggested by the production-based data.

1.1.3 The consumption-based measure has made it easier to understand the sources of emissions and hence for us to prioritise actions.

1.1.4 The measure has provided a more complete story regarding emissions that is making it easier to link these to the behaviours that people need to address.

1.1.5 The consumption-based measure is fairer than a production-based measure because it gives us responsibility for all of our emissions including any emissions occurring elsewhere in the world as a result of consumption.

2. About the Environment and Climate Change Board

2.1 The West Sussex Environment and Climate Change Board (ECCB) was set up in 2010 to ensure that issues related to these agendas are given the highest priority in the County. Board members are drawn from senior management or cabinet level across the public, private and voluntary sectors.

2.2 The Board brings together significant organisations from all sectors to ensure that shared environment, sustainability and climate change objectives and priorities are fully understood, effectively communicated and embedded in the development and delivery of proposals and strategy across the County. We are fortunate in being able to draw on the broad range of knowledge and expertise of the Board members to inform our views. The current chairman of the Board is Professor Bob Allison, Professor of Geography and Pro-Vice-Chancellor at the University of Sussex.

2.3 The ECCB aims to support people in West Sussex to reduce their emissions because changing residents’ use of energy at home, work and on the move is critical for reducing the UK’s overall emissions contributing to climate change. In order to achieve this aim, the ECCB has developed an action plan for the county of West Sussex to meet and identify environmental challenges and opportunities brought about by a changing climate. This action plan establishes a carbon budget for the County and West Sussex is one of the first Counties in the UK to set itself a carbon budget. The action plan is supported by all Board members and a wide group of stakeholders.

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

3.1 West Sussex County Council recently completed a residents’ consumption-based carbon footprint, incorporating emissions from both production and consumption activities within the County [1]. It shows that the carbon footprint of West Sussex residents is almost double that suggested by the production-based emissions data provided by the Department of Energy and Climate Change [2].

3.2 This footprint has enabled us to develop a consumption-based local carbon budget for West Sussex that has been incorporated into an action plan specifying a programme, to reduce emissions. The consumption-based footprint has ensured that this programme is more accurate in the allocation of emissions sources.

Page 23 4. What are the benefits and disadvantages associated with taking a consumption-based rather than production-based approach to greenhouse gas emissions accounting?

4.1 We have found that one of the greatest advantages of using a consumption-based approach to greenhouse gas emissions accounting, rather than a production-based approach, is that it has given us a more complete story regarding the sources of emissions. For example, not only is the energy used by residents in West Sussex for heating, cooking and lighting in the home measured, but also the energy used to produce the food and goods consumed by residents. This level of detail is going to be really important to enable us to make such data, and thus our action plan, relevant to residents and easier to communicate.

4.2 The consumption-based carbon footprint has provided the sort of information that we can use to help residents to easily understand the way that their behaviour affects the footprint and what they can do to reduce their emissions. This is important to be able to do because research undertaken by Defra shows that whilst most people say they are willing to do a bit more to help the environment, about a quarter of people disagree that their lifestyle contributes to climate change [3].

4.3 A consumption-based carbon footprint such as that produced for West Sussex provides an approach that could be described as fair because it includes not only direct emissions from buildings, energy and transport, but also all of the embodied CO2 in goods, food and materials used by the residents of West Sussex. This includes the impact of the supply chains of products and services reaching households in the County, including any emissions occurring elsewhere in the world as a result of these.

4.4 If we do not make an effort to reduce consumption, as well as production, emissions then any reduction in emissions brought about by improvements in efficiencies and distribution may well be exceeded by continued consumption.

October 2011

[1] M. Berners-Lee (2011). A Local Carbon Budget for West Sussex: Managing greenhouse gas emissions from consumption by residents, industries and the County Council.

[2] Department of Energy and Climate Change, 2009. Local and regional CO2 emissions estimates for 2005-2009 – Full dataset.

[3] Defra (2007; 2009). Survey of Attitudes and Beliefs towards the Environment

Page 24 Memorandum submitted by the Lake District National Park Authority (CON 06)

1. Summary • The Lake District National Park aims to be a leader in responding to climate change, and is working in partnership to develop and manage a consumption-based carbon budget for the local area – the first of its kind. • We have found that consumption-based measures give a much more comprehensive picture of emissions. They include the emissions embedded in imports and supply chains and provide an easily understandable picture of impacts. • With the help of Small World Consulting, we have developed a methodology for estimating emissions on a consumption basis, which has now been used by a number of local areas. • Consumption-based reporting has significant benefits: it gives a comprehensive picture of emissions; developing a ‘carbon budget’ gives people a clear understanding about how much carbon can be ‘spent’; emissions are attributed to understandable units (such as ‘food and drink’); indirect emissions associated with behaviour and lifestyles are much better explained through the lens of consumption. • The main drawbacks are that the measurement is more complex, with greater uncertainties; and it makes comparisons between different areas difficult, if different methodologies are used. • On the basis of our experience, we believe that local areas should adopt emissions reduction targets and management strategies based on consumption rather than production. It would also be useful to have national-level consumption-based carbon accounting.

2. About the Lake District National Park Authority The Lake District National Park Authority (LDNPA) looks after the Lake District, the largest of the UK’s fifteen National Parks. We aim to be an inspirational example of sustainable development in action, with a prosperous economy, world class visitor experiences, vibrant communities and a spectacular landscape. The National Park is managed with the help of the Lake District National Park Partnership,a group of 24 organisations1 from the public, private and voluntary sector, who collectively own the Vision and Plan for the Lake District.

3. Our approach to climate change Sixteen million people a year visit the Lake District. Like generations before them, they are inspired by the spectacular landscape of fells and lakes. Yet climate

1 Partnership members include: Action with Communities in Cumbria (ACT); Environment Agency;Allerdale Borough Council; Forestry Commission; Copeland Borough Council; Friends of the Lake District; Country Land and Business Association; Government Office North West; Cumbria Association of Local Councils; Lake District National Park Authority; Cumbria County Council; National Farmers' Union; Cumbria Tourism; National Trust; Cumbria Vision; Natural England; Cumbria Wildlife Trust; North West Development Agency; Eden District Council; RSPB; English Heritage; South Lakeland District Council; Nurture Lakeland.

Page 25 change could alter the Lake District considerably, as weather patterns, agricultural practices and local economies change and adapt. We want to inspire our visitors, residents and businesses to take action. Tackling climate change – through promoting renewable energy, offering sustainable transport alternatives, and encouraging low-carbon tourism – brings economic and social benefits as well as carbon reductions.

In recognition of this, the Low-Carbon Lake District Initiative was established in 2008. Since then, we have: • Secured commitment from the Lake District National Park Partnership to develop and implement a consumption-based carbon budget for the Lake District (see below); • Won a £5m grant from the Department for Transport to develop a sustainable, low-carbon transport network for the Lake District; • Worked with local tourism organisations to promote low-carbon tourism options; • Participated in the Cumbria Warm Homes Project to offer home energy checks and energy efficiency improvements to local residents; • Worked with partners to promote renewable energy options, particularly small-scale technologies such as hydro and solar PV; • Collaborated with land managers and the farming community to measure and manage carbon storage in the landscape; • Put initiatives in place to reduce our own emissions by 25%, including energy efficiency improvements, biomass heating and encouraging staff behavior change.

4. The carbon budget and consumption-based emissions reporting The Lake District is one of the first local areas in the UK to set itself a carbon budget. In 2010 The Lake District National Park Partnership agreed to establish and manage a carbon budget for the National Park as a whole. The process worked as follows: • We commissioned research from Small World Consulting to estimate the carbon emissions from the Lake District National Park, using a consumption-based approach. This showed that the Lake District is responsible for 2.3 million tonnes CO2e (the full report is available at www.lakedistrict.gov.uk/lowcarbonlakedistrict) This figure includes travel to and from the Lake District, but does not count business emissions unless goods and services are consumed in the area. • The Lake District National Park Partnership agreed a target to reduce this footprint by 1% per year in line with national statutory carbon budgets as enshrined in the Climate Change Act. This amounts to a reduction of 23000 tonnes in the first year. • The Partnership developed an Action Plan detailing initiatives put in place to reduce emissions of carbon and other greenhouse gases (such as those described above). Different organisations are leading on emissions reduction in transport, tourism, buildings and so on. • The carbon reductions arising from these actions were assessed, again using a consumption-based approach, to measure progress towards the annual target. The latest assessment shows that, in the first full year of the

Page 26 budget, we have identified carbon savings amounting to between 0.3% and 0.5%, falling short of the 1% reduction target. • The Carbon Budget is used to communicate with a wide range of organisations, including local businesses, to explain how the Lake District is managing its carbon emissions. In this way, the Partnership intends continue to measure, manage and co- ordinate its response to climate change.

Given this experience, the LDNPA offers the following views on the issues being considered by the Committee.

5. How do assessments of greenhouse gas emissions differ when measured on a consumption rather than a production basis? Consumption-based measures give a much more accurate picture of emissions from the Lake District National Park. There are several reasons for this. Firstly, it includes the emissions embodied in imports and supply chains. Secondly, a consumption-based approach is a better way of measuring the impact of the tourism industry, which is a ‘consumption based’ industry – ie measuring the carbon associated with visitors’ use of accommodation, cafes, restaurants, shops and transport services. Third, consumption-based measurement gives a more understandable picture of impacts. It is easier to explain to different groups, such as tourism providers, what the climate change impacts of their actions is, and what they can do to mitigate it.

The table below shows the carbon footprint of the Lake District National Park, measured on a consumption basis.

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A clear picture emerges from this data, which differs from a production-based analysis, and offers much better guidance about mitigation strategies. The main differences are as follows: • Household energy use (the top two bars) is a less significant source of emissions than if measured using a production-based approach • Transport (particularly aviation) is a very significant impact. In terms of guiding action, this means that serious consideration should be given to initiatives that influence how people travel to and from the Lake District. For example, efforts should be made to encourage UK holidaymakers to holiday at home. • Accommodation, food and drink is another significant source of emissions. This is due to the importance of the tourism industry in the Lakes. This points to the importance of encouraging locally sourced, seasonal food, which can have significant carbon benefits. This analysis has led to an increase in work to promote local food.

6. 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? The process that we have undertaken (see description above) is a straightforward, practical way of measuring emissions from consumption. The complexity of measuring emissions in this way means that it will only ever be an estimate. However we have found that people value information presented in this way, and understand the inherent uncertainties. They would prefer an estimate of the whole picture of emissions, rather than precision about things that can be measured and disregard of anything that cannot be measured.

Developing clear protocols for measuring consumption-based emissions would help greatly, by allowing comparison between different local areas, companies or countries.

7. What are the benefits of consumption-based reporting? We have found the following benefits to our approach described above: • It gives a comprehensive picture of emissions, because it includes imports and supply chains. • Using a ‘carbon budget’ framework, based on consumption figures, is helpful because it can be explained in a similar way to a financial budget. Given that there is only a certain amount of carbon that can be ‘spent’, this approach stimulates discussion on what the carbon should be ‘spent’ on, and how the budget can be managed. • Communication is helped by emissions being attributed to understandable units, such as ‘food and drink’, or ‘accommodation’, rather than units of fuel, heat or electricity. This helps to prioritise mitigation actions. • A consumption-based approach is particularly useful for local areas. Local government has less control over, or responsibility for, large sources of direct emissions (such as energy generation plant and manufacturing industry) and more opportunity to influence indirect emissions through behaviour and lifestyles. The latter is better understood through the lens of consumption.

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8. What are the disadvantages of consumption-based reporting? Our experience shows the following disadvantages: • Measuring consumption is more complex, and will only ever provide an estimate of the picture – see discussion above. Nevertheless it provides a more comprehensive picture. • It is difficult to compare with other areas who have used different methodologies. For example, we cannot compare our emissions per capita with areas who have measured their impact using standard production-based techniques. Consumption-based analyses will nearly always (in the UK) result in higher figures for emissions per capita, due to the inclusion of imported goods.

9. Would it be desirable and practicable for the UK to adopt emissions reduction targets on a consumption rather than production basis? We believe that local areas should adopt emissions reduction targets based on consumption rather than production. As described above, this is a much better measure of the impact of a local area. Since the Lake District National Park defined its carbon budget last year, two other local areas – West Sussex and Greater Manchester – have followed suit.

It would also be useful to have national-level consumption-based carbon accounting, as well as clear protocols for local areas, individual businesses and others who would like to use consumption-based approaches, to enable comparisons.

October 2011

Page 29 Memorandum submitted by The Packaging Federation (CON 07)

The following submission is made by Dick Searle (Chief Executive) on behalf of The Packaging Federation, a not-for-profit organisation representing the UK Packaging Manufacturing Industry. As a manufacturing sector, our Industry comprises some 3% of UK manufacturing with approximately 85,000 employees and a turnover in excess of £11 Billion.

EXECUTIVE SUMMARY

• We believe that the current use of “production based emissions reporting” is creating an entirely false view of the true impact of UK consumption of goods and services. If the twin challenges of Global Warming and Resource Efficiency are to be robustly addressed, it will require dramatic changes across the behaviour of the whole of society not just that of business. However, current policies are directed to require business to reduce their impacts and measurements of production based emissions comprehensively fail to capture the true worldwide impacts of servicing UK demand for goods and services.

• Carbon demand is created initially by consumer demand for goods and services – and industry does not have an infinite capacity to compensate for this but there appears to be little political recognition of this. Despite claims to the contrary, the global carbon footprint of UK (consumer) demand has actually increased by some 30% in the period from 1990 - 2006 and it is only a substantial shift in the manufacturing of goods away from the UK (carbon leakage) that has enabled the claim that the UK’s “local” carbon footprint (based on “production reporting”) has actually reduced. Any policy that expects industry to reduce UK industrial carbon impact whilst the global impact of consumer carbon demand is ignored can only lead to a further and substantial erosion of the UK’s manufacturing base.

• There is a clear lack of (political) leadership for consumers on issues of the environment and resource efficiency and there is an overwhelming need for a policy that bases consumer “education” on sound science and information. Failure to address this will lead to a continued mismatch between the nature of consumer demand and the industrial strategy that seeks to fulfil it. It is absolutely essential that policies directed at the achievement of real progress on climate change and resource use goals are based only on sound scientific assessment and consumption based emissions reporting is an essential tool in achieving accurate assessment of the nation’s true impacts on the global environment.

DETAILED SUBMISSION

1) We believe that the current use of “production based emissions reporting” is creating an entirely false view of the true impact of UK consumption of goods and services. If the twin challenges of Global Warming and Resource Efficiency are to be robustly addressed, it will require dramatic changes across the behaviour of the whole of society not just that of business. However, current policies are directed to require business to reduce their impacts and measurements of production based emissions comprehensively fail to capture the true worldwide impacts of servicing UK demand for goods and services. In essence we believe that there are two alternative scenarios as Governments and societies at large seek to address the challenges of the future.

Page 30 a) A scenario where there is full engagement with society (consumers) at large about the way in which we live and consume resources, if reductions in greenhouse gas (ghg) emissions of 80+% by 2050 are to be accomplished. Any such scenario would describe a very different world which will clearly require “seismic changes” in demand profiles and the ways in which this demand is satisfied. It would also require frank and honest exchanges between consumers and government on such changes and the reasoning and science behind them. Clearly, such a scenario would be politically unpopular and would require a high degree of international co-ordination but it would leave UK business far less vulnerable to the unilateral nature of current UK “carbon policy” and would have a much greater chance of delivering the actions needed to meet ghg and resource efficiency targets. This science based approach to addressing the dual challenges of climate change and resource use will require relevant measurement of the impacts of the way in which society impacts the environment and this can only be achieved by the full and honest reporting of the UK and Global impacts associated with UK consumption of goods and services.

b) The second scenario is much closer to current thinking which appears to lack any significant level of positive or scientifically based engagement with consumers. In essence, consumers are expected to continue to behave within current patterns whilst UK business is expected to compensate for the carbon, environmental and resource efficiency impacts of such behaviour. Whilst this has the apparent advantage of avoiding unpopularity with consumers (voters), it is extremely unlikely to reduce impacts to targeted levels whilst, at the same time, putting UK business at a very substantial disadvantage to its international competitors. Continuation of the current practice of production based consumption will lead to a false sense of security and progress and will make it increasingly difficult to convince consumers that any change in consumer behaviour and consumption patterns are relevant or necessary.

2) Successive Governments have laid great emphasis on the role that the UK should play in reducing ghg emissions and providing leadership to the wider world. Apart from the huge dangers that this poses to the competitiveness and continued existence of UK based manufacturing, such a policy is deeply flawed if it continues to ignore the impact of UK consumer demand on global ghg emissions. Carbon demand is created initially by consumer demand for goods and services – and industry does not have an infinite capacity to compensate for this. And yet, there appears to be little political recognition of this. Despite claims to the contrary, the global carbon footprint of UK (consumer) demand has actually increased by some 30% in the period from 1990 - 2006 (Policy Exchange Report: Carbon Omissions – attached as Appendix 1) and it is only a substantial shift in the manufacturing of goods away from the UK (so called “carbon leakage”) that has enabled the claim that the UK’s “local” carbon footprint has actually reduced. Any policy that expects industry to reduce UK industrial carbon impact whilst the impact of consumer carbon demand is ignored can only lead to a further and substantial erosion of the UK’s manufacturing base. As a matter of urgency, a parallel roadmap for consumer demand/behaviour (a “Green Consumer Roadmap”) needs to be prepared. Whilst there appears to be little political will to do this, it is absolutely inevitable that it will be necessary sooner rather than later if UK and global targets are to be met – and failure to do so now will lead to policies for UK business that could be highly inappropriate and damaging in the future. Such a “Roadmap” will need to take account of the true global impact of UK demand – measured on a consumption basis.

Page 31

3) Much of UK manufacturing industry, and certainly a significant proportion of our own industry, is owned by companies based outside the UK. The acid test for future policy will be whether or not it describes an industrial scenario that is likely to encourage investment into UK based businesses. In our experience, there is a growing trend to avoid investing in UK based business – primarily as a result of grave concerns over the impacts of Government Policies on energy taxation, carbon pricing and a perceived obsession with being the leader in de-carbonising its industrial economy (at a time when its international competitors are not following its lead). Any policy that fails to recognise and address these current perceptions will fail the “acid test” and inward investment will continue to fall with all the attendant impacts on policies which expect the private sector to compensate for loss of employment in the public sector.

Dick Searle CCMI Chief Executive The Packaging Federation

October 2011

Page 32 Memorandum submitted by Tata Steel (CON 08)

0. Summary 0.1 We think the consumption-based approach avoids the issue of burden shifting across national boundaries (carbon leakage) and stimulates a life cycle approach to product design. The use phase of products causes much higher emissions than the production phase does e.g. for cars and buildings. The benefits of design for reuse (e.g. reuse of (parts of) buildings, lighter cars) and design of energy efficient goods reduce emissions in a more cost-effective way. Products should be designed and used in a way that the use of less carbon becomes a financial benefit.

Specific 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 A production based approach only considers the emissions that are directly associated with manufacturing steel in the UK. In contrast, a consumption based approach considers the emissions associated with manufacturing steel in the products that are used and consumed in the UK. The main difference between the two approaches is that consumption discounts for the impact of trade between the UK and other regions of the world, which can be significant.

1.2 Using trade statistics for steel products and UK production data for 2008 a preliminary analysis of the difference between UK CO2 emissions, calculated on a consumption rather than a production basis, has been carried out. This has shown that the UK is a net importer of around 13 Mt CO2 for steel containing products and goods, which is half of UK production emissions.

1.3 Figure 1 shows the flows of steel in the UK and how a significant amount of steel, in the form of finished steel products and steel goods, requires steel to be made outside of the UK.

Figure 1: Steel flows and CO2 emissions associated with the consumption and production of steel in the UK in 2008. Steel flows are shown in black and associated CO2 emissions are shown in red (in brackets) in units of Million tonnes. Steel material flow data are taken from ISSB and CO2 figures have been calculated from worldsteel data.

Page 33

1.4 From a consumption perspective Figure 1 illustrates that:

√ The import of steel in goods, such as cars, accounts for a significant proportion of the consumption based emissions because 11Mt of steel goods requires the production of 15Mt of crude steel and further processing elsewhere in the world. The difference between these two figures (4Mt) reflects yield losses in the supply chain. √ The UK is a net exporter of steel scrap, which from a consumption perspective reduces the national emission figure because there is a saving in CO2 emissions in the countries that use the scrap. If steel scrap is excluded from the analysis then consumption emissions increase to 183% of production emissions.

1.5 Figure 2 shows a breakdown of consumption based emissions and demonstrates how trade of steel products and scrap impact on the total UK figure when compared to UK production emissions reporting.

Consumption Based CO2 Emissions for the UK Steel Sector in 2008

80,000 75,766

70,000

60,000

48,504 50,000 48,171

39,206 40,000 83%

Emissions (kt) Emissions 49% 2 30,000 26,290 CO

20,000

100% Consumption 100%

10,000 Consumption Production Production

0 UK Steel Imports Exports Total Imports Exports Total Production

UK Steel Consumption Excluding Scrap UK Steel Consumption Including Scrap

CO2 Emission Source

Crude Steel Semi / Finished Steel Products Steel Goods Scrap Total Emissions

Figure 2: Consumption Based CO2 Emissions for the UK Steel Sector in 2008. Data are based on those shown in Figure 1.

1.6 The data, on which this assessment is based, would need further refinement to account for differences in yields and manufacturing emissions between different product categories. Issues such as transport of imported goods might also need to be included. However, these differences are likely to be relatively small and similar conclusions have also been drawn by the Carbon Trust1 and Allwood et al.2

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 The work carried out by ourselves and others e.g. Carbon Trust, has shown it is possible. The challenges are:

1 Carbon Trust, International Carbon flows, Steel, 2011, 2 J Allwood, J Cullen, Sustainable Materials with Both Eyes Open, Cambridge, 2011

Page 34 √ Consumption has to include the use of final products (eg cars) and not just individual sectors (eg steel, power, automotive and construction etc.) to avoid burden shifting. The feasibility of this could be investigated using Life Cycle Assessment methods. √ Prevention of double counting: e.g. end-use sectors versus material production like automotive versus the steel industry. √ Recycling: a huge benefit of steel is the possibility of infinite recycling. The very high rates of recycling that are achieved in many sectors should be rewarded in the methodology. The approach proposed in the Figure 2 should be used as starting point. √ Calculating the carbon emissions caused by imported goods (e.g. a car) outside the UK is very difficult. This could be solved by using worst case default data until the company can prove their product has a better performance. In other words, the emphasis should be put on the supplier to provide this information.

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 Benefits: √ The consumption-based approach is fair compared to the production-based approach, because when the UK causes emissions abroad, it’s the responsibility of the UK. √ Both companies and consumers have a responsibility to reduce emissions. Companies have successfully reduced emission (and should continue to reduce), but it seems to be hard to get the consumer to take some of the responsibility. Consumption-based emission reporting might be used to increase the awareness of consumers or even be used to force the society to reduce emissions per capita. √ All parts of the life-cycle are taken into account, which will give a good overview at which point in the life-cycle the most cost-effective measures can be taken. 3.2 Disadvantages: √ It’s very hard to get good data at a disaggregated level. The latter is needed to improve the quality of the assessment and determine route causes of CO2 emissions. √ One of the possible measures to reduce the carbon emission on a consumption level is Boarder Adjustments. BA’s are very hard to apply, because the complexity of the “carbon emission content” of imported goods.

4. Is there any evidence of industry relocating from the UK to other countries as a result of UK climate change policy? 4.1 The question should not be relocation, but diminishing competitiveness: what’s the difference in margin/profit in the EU and outside the EU. This is important, because relocation will only take place after a long time of ‘harvesting’ the current installations (=minimal maintenance) where margins are low/negative. The figure below (Carbon Trust: International Carbon Flows, Steel. 2011) show that cost of carbon is very important for the margin. CIS countries are most important for European steel industry.

Page 35

4.2 Several studies have been carried out that show the potential risk of carbon leakage as a result of Climate Change policy. They all agree that the Iron and Steel industry is at risk and the EC should make sure that this will be minimised. In the EU ETS directive carbon leakage is defined by two indicators: (1) Increase of indirect and direct carbon costs, calculated as proportion of GVA and (2) Intensity of trade with non-EU. The graph below (circle) shows the position of the Iron and Steel industry.

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

Page 36 5.1 It would not be desirable for the UK unilaterally to adopt targets based on a different currency from the rest of the world. It would be desirable on a world wide scale. It will show the parts of the supply chain with the highest potential for improvement. This is often the use phase, so the focus should be on the energy efficiency of the product rather than the material. E.g. the example of the Body In White (BIW) of a car (see: http://worldsteel.org/?action=programs&id=65). The total weight of a typical five-passenger family car is 1,260 kg, with the BIW structure accounting for 360 kg. By replacing the BIW with an optimised structure made of Advanced High Strength Steel (AHSS) products (at little additional cost relative to conventional steel) the overall weight saving is 117 kg or 9%. Due to this weight reduction, the powertrain can be down-sized to achieve vehicle performance comparable to that of the heavier, conventional steel structure vehicle. The resultant fuel saving is 5.1%. This is a 5.7% reduction in GHG emissions over the full life cycle of the vehicle.

In the Netherlands, half of the energy efficiency target, in the steel industry, can be met by energy efficient products instead of energy efficient steelmaking (which is the other half of the target). The consumption-based approach should also include the economic parameters like employment: a consumption based approach might give the same environmental improvement with less loss of employment in the UK.

5.2 It is not yet practicable. A lot of assumptions will have to be made to get useful figures. However, we shouldn’t accept to be in a policy lock-in of production based reporting. In other words: although the production based data are much better at the moment because we have been collecting them for a long time, it doesn’t mean that we shouldn’t start the collection of consumption based data if we think the latter approach will be more fruitful in the end as the basis for policy making. A start might be made with a few sectors. Another solution for lack of data is to start with some (worst case?) default assumption, so the database can be improved at a later point.

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 It will show that imports account for a lot of carbon emission outside of the UK. The potential policy implication might be to create price adjustments for our emission abroad. This will incentivise the production of low carbon goods (instead of the current penalty for producing low carbon products in the UK). This will then create additional skilled jobs and keep employment in the UK.

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

October 2011

Page 37

Memorandum submitted by Dr. Rupert Read (CON 09)

Dr. Rupert Read, University of East Anglia and Co-ordinator of Eastern England Green Party. (Note: This submission is not made on behalf of UEA, though it does draw at one point on my own academic research.)

Summary: This submission: • Draws on the author’s political and journalistic experience to note and explore the failure of the previous Government to come clean about Britain’s rising carbon emissions, once one takes into account factors such as ‘embodied’ emissions, and calls on the present Government to embrace honest full disclosure of the record, using a consumption-based emissions reporting system (and including in this air travel beginning in the UK, and some portion of sea travel); • Draws on the author’s philosophical research to note and explore the danger of taking ‘developing’ countries to be more economically ‘efficient’ as a reason for justifying under the banner of ‘globalization’ the ‘offshoring’ of industrial production there – because such offshoring is often carbon-inefficient, as consumption-based emissions reporting would make clear.

1. For a period of years, I pursued first David Miliband and then his brother Ed, in the relevant government Departments, seeking to get them to answer the questions that I outlined at the links just below, concerning the crucial issue of embodied emissions and related reasons why Britain’s seeming emissions reductions since 1990 have been delusive: See for instance http://rupertsread.blogspot.com/2007/10/who-will-lead-on- combatting-dangerous.html & http://liberalconspiracy.org/2010/05/22/the-miliband-commitment-to- climate-change-is-mostly-just-rhetoric/ 2. As I suggested in my more recent article on this at LeftFootForward (http://www.leftfootforward.org/2010/07/a-green-perspective-on-ed-miliband/ ), one possible way forward with this is for “emissions…to be counted where they originate, in the countries that can potentially control them.” However, I also noted that “Of course…it would…be perfectly possible to exercise significant control over them, if our country were willing, as I believe it should be, to control products’ entry into our borders partly on the basis of their emissions footprint.” (I would urge the Committee to consider this point: that it is not enough to assess emissions on a consumption basis… We should also control what products we import on the basis of those assessments.) 3. I received no answer from the Milibands to my queries as to the misrepresentation of Britain’s record of emissions-reduction under Labour, until finally I managed to button-hole Ed Miliband in person: as briefly outlined in the LeftFootForward piece referenced above. The Coalition government has a heavy responsibility upon it (1) To be honest in reporting Britain’s record on emissions, which is in reality one of growth, not of

Page 38 reductions, and (2) To change to a system of consumption-based emissions measurement.

4. My current philosophical work, done in part in co-operation with UEA’s environmental scientists, and in co-operation with colleagues in the Green House thinktank (see Jonathan Essex’s submission from Green House, for detail), focuses on the needful effect of our reaching and breaching the social and ecological limits to growth (notably, the limits on the carbon-absorptive capacity of the atmosphere, without dangerous temperature-rise and chaotic climate effects) on our politics and our economy (See e.g. my recent published academic papers referenced at http://blog.talkingphilosophy.com/?p=3100 .) One crucial moral of this work of mine (and of the current work of my student, Ruth Makoff) is this: That it is disastrous for our chances of maintaining climatic ecological viability that we continue as a society to measure efficiency with reference to minimising labour costs rather than with reference to minimising material throughput (i.e. minimising ecological impact). This can be swiftly illustrated in a way that is directly relevant to the current inquiry of the Committee: 5. Very roughly, over the past 20 years Britain has exported a very large amount of greenhouse gas (GHG) emissions to China. These emissions, produced in China and consumed in Britain, are not counted at present in Britain’s GHG emissions figures. They are counted in China’s. When one studies China’s GHG emissions figures relative to China’s GDP and other economic indicators, one finds that the energy- and emissions- intensity of production in China is far greater than that in Britain. In simple terms: Production has moved to China, because of the cheapness of Chinese labour. But, viewed in terms of the global ecological economic efficiency, this is a crazy change to have made, because, though Chinese production is ‘efficient’ relative to labour (because China is, as Tony Judt aptly phrases it, a ‘low rights’ country, where labour is treated more brutally than here), it is inefficient relative to energy and emissions. It is only because the latter are not priced in any remotely- adequate way (to reflect the damage of climate-dangerous emissions, not to mention the using up of scarce hydrocarbon resources), and not rationed or capped at all, that production has moved to China in the first place. It would have been more rational, considered from the point of view of the global ecosystem and the political economy of the world in the context of that limited ecosystem, for much of this production to have remained in Britain (and in the U.S., etc.), and only for industries which are labour-intensive but NOT energy- or emissions- intensive to have migrated to China. 6. This massive global irrationality has been concealed from British voters and consumers because of the way in which emissions are counted (in the place of their production rather than of their consumption), because of the fact that they are barely if at all registered on products, because of the fact that they are not controlled at all at point of entry, and because it is convenient for British political elites to downplay this irrational inefficient exporting of emissions (See above for my account of the Milibands’ downplaying of this.). 7. This must change.

October 2011

Page 39 Memorandum submitted by West Sussex County Council (CON 10)

West Sussex County Council welcomes the Energy and Climate Change Committee’s current inquiry regarding the case for consumption-based greenhouse gas emissions reporting, and is grateful for the opportunity to comment on two of the specific issues that it has chosen to examine based upon our experience.

1. Executive Summary

• The consumption footprint is around twice the scale of the production measure in West Sussex. • The nature of the consumption measure better reflects people’s intuitive understanding of their footprint, so is more meaningful for residents. • The consumption approach enables place-based local leadership more than the production measure and lends itself to useful political narratives about taking responsibility for our actions. • By linking the footprint to behaviours, we have found consumption metrics useful for policy assessment and evaluation, making it more practical to mainstream activity on carbon. • In practice, consumption-based metrics highlight the need for changes in consumption patterns and lifestyle, and also provide tools to help make this possible. This would be more powerful still if it were part of a nation- wide approach.

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

2.1 In 2010 West Sussex County Council commissioned research to establish a baseline consumption-based carbon footprint for County residents and a consumption-based carbon footprint for the County Council. The residents’ footprint was based on the emissions generated from all the products and services that they use and buy. The Council’s footprint included direct emissions resulting from electricity and water consumption, and emissions in the supply chains of procured goods and services, and commuting. The CO2e for the residents was estimated as 13.7 million tonnes CO2e and the per capita figure as 17.3 tonnes.

2.2 The consumption-based carbon footprint for the County’s residents allowed the emissions, arising from the products and services that residents use and buy, to be broken down into sixteen segments (Fig. 1) [1]. By contrast, the data on carbon emissions provided by the Department of Energy and Climate Change (DECC) is broken down into only three segments based upon data related to electricity, gas and vehicle fuel use (Fig.2) [2]. In the latter data, the County Council’s emissions are included in the Industry and Commercial segment. According to the DECC data total CO2 emissions in the County are estimated as 4.9 million tonnes; that is almost 9 million tonnes less than the consumption-based estimate. The per capita figure is 6.2 tonnes, less than half the amount calculated in the consumption-based footprint. The

Page 40 consumption footprint is around twice the scale of the production-based measure in West Sussex.

2.3 The consumption-based breakdown is easier to understand because it provides a much richer and more action-oriented breakdown than production metrics ever have for local government. It also provides a more comprehensive representation of the source of emissions, and is thus better for informing local policy on tackling climate change.

Figure 1: Breakdown of the carbon footprint of West Sussex residents’ by source (Mike Berners-Lee)

32% 34% Industrial and Commercial Domestic

Road Transport

34%

Figure 2: Local CO2 emission estimates

Page 41 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. Because a consumption-based model allows a carbon footprint to be broken down into more than the three very broad segments used in the production data, we have found that it is a more comprehensive representation of the source of emissions, and thus better for informing policy. Also, this way of representing the data better reflects people’s instinctive understanding of their carbon footprint, so will be more meaningful than production measurements. WSCC is one of the first Council’s in the UK to set a carbon budget; the comprehensive nature of the consumption footprint benefits this approach because it includes imports and supply chains.

3.2. The consumption approach is appropriate for place-based approaches, which focus attention on geographic and community settings. Place-based approaches will be important in reducing carbon as they provide a means to grasp complex connections and to address challenges and opportunities where the impacts are directly felt. As place-based approaches help us understand individuals' carbon impact, they will be an important stepping- stone towards helping our communities to understand and take responsibility for reducing their carbon impact. The latter is critical as one of the main challenges in addressing climate change is about lifestyles and consumption.

3.3. According to Professor Tim Jackson of Surrey University, the essential shifts required in the scale and pattern of consumption to achieve the Government’s climate change targets relies on being able to influence the expectations, choices, behaviours and lifestyles of consumers [3]. We have found that using consumption data provides a clearer indication of the behaviour changes that will be required. For example, instead of always buying new goods people will need to maintain, as well as, recycle goods in order to reduce the 9% of the consumption footprint that is down to ‘other non-food shopping’ (Fig. 1). Rather than impacting negatively on the economy this example could bring economic and social benefits to the local community by a growth in the second hand, repair and refurbish industries.

3.4. Understanding the County Council’s consumption-based footprint also allows the Council to address its wider indirect carbon impact, covering emissions from procurement of goods and services and commissioning (scope 3 emissions). This enables us to measure, monitor and manage actual carbon emissions and set carbon budgets for all our services, which are managed alongside financial budgets. We believe that the method used in West Sussex (Fig 1) provided ‘good enough’ data on an affordable basis for policy-making.

3.5. WSCC believes that a consumption-based approach is important if we are going to tackle climate change in an honest way that does not shift responsibility for our carbon emissions, from the goods and services that we buy, to other countries. Consumption-based accounting should be

Page 42 focused on the consumer as the driver of emissions. Domestic emissions can be reduced by relocating production abroad, and/or by substitution of domestically produced goods with imports. WSCC, therefore, believes that it is desirable for the UK to adopt emissions reduction targets on a consumption rather than production basis. This will ensure that we send the right signals to consumers about behaviours and lifestyle choices that will support government policies on climate change.

October 2011

[1] Small World Consulting Ltd, 2010. A local carbon budget for West Sussex: Managing greenhouse gas emissions from consumption by residents, industries and the County Council.

[2] Department of Energy and Climate Change, 2009. Local and regional CO2 emissions estimates for 2005-2009 – Full dataset.

[3] Tim Jackson, 2006. Challenges for Sustainable Consumption Policy in Sustainable Consumption, edited by Tim Jackson, Earthscan, London.

Page 43 Memorandum submitted by the Mineral Products Association (CON 11)

1. Introduction 1.1. The Mineral Products Association (MPA) is the trade association for the aggregates, asphalt, cement, concrete, lime, mortar and silica sand industries. With the addition of The British Precast Concrete Federation (BPCF), it has a growing membership of 418 companies and is the sectoral voice for mineral products. MPA membership is made up of the vast majority of independent SME companies throughout the UK, as well as the 9 major international and global companies. It covers 100% of GB cement production, 90% of aggregates production and 95% of asphalt and ready-mixed concrete production and 70% of precast concrete production. Each year the industry supplies in excess of £5 billion of materials to the £110 billion construction and other sectors. Industry production represents the largest materials flow in the UK economy and is also one of the largest manufacturing sectors. 1.2. This response to the inquiry on consumption based GHG reporting draws on the experiences on MPA Cement which is part of the Mineral Products Association.

Specific Inquiry Questions 2. How do assessments of the UK’s greenhouse gas emissions differ when measured on a consumption rather than a production basis 2.1. Research1,2 suggests that the consumption based calculation of the UK’s GHG emissions shows quite a different picture to the inventory of emissions originating from UK based sources and that the problem is not unique to the UK3. 2.2. It is important that the UK begins to look seriously at consumption based emissions reporting. The pressure from globally unequal carbon pricing is increasing on UK manufacturing installations and ‘carbon leakage’ threatens to increase the rate of manufacturing loss from the UK. Annex I shows the cumulative burden of carbon taxation on UK cement manufacture in 2013 when the UK’s Carbon Price Floor is introduced. 2.3. Over the period 2001 to 2010 sales of cement have decreased by 26% but imports by non GB manufactures have increased by 10%. As a result the market share of non GB manufacturer imports has risen from only 3% in 2001 to 13% in 2010 (Annex II). At present the UK GHG statistics would translate this into a reduction of emissions4. Clearly this would misrepresent the UK’s GHG ‘footprint’ emissions and lead to potentially false claims about the UK’s contribution to the mitigation of climate change.

3. 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?

1 Carbon Trust 2011 – International Carbon Flows 2 Policy Exchange 2010 - Carbon Omissions Consumption-based accounting for international carbon emissions. Andrew Brinkley & Dr Simon Less 3 Glen P. Peters, Jan C. Minx, Christopher L. Weber, and Ottmar Edenhofer. Growth in emission transfers via international trade from 1990 to 2008. Proceedings of the National Academy of Sciences of the United States of America. May 24, 2011 vol. 108 no. 21 8903-8908 4 if we consider sales and production to be the same for the purposes of this example

Page 44 3.1. In the UK, verified data is available on cement manufacturer and the emissions associated with its production emissions. It would not be too difficult to estimate the emissions from imported product as the product is produced to tight specifications, placed on the market only when complying with a harmonized European standard. Cement product types are therefore relatively homogenous, especially for the emissions intensive intermediate product, clinker5.

4. What are the benefits and disadvantages associated with taking a consumption-based rather than production-based approach to greenhouse gas emissions accounting? 4.1. The benefits are clear in that consumption based emissions reporting will more closely reflect the carbon footprint of the UK. It will encourage locally based manufacture and help secure UK manufacturing jobs. It will improve security of supply for strategically important materials such as cement used for construction and lime used for drinking water treatment and steel manufacture. It will help to prevent the migration of skills outside of the UK. 4.2. The principle disadvantage to a consumption based approach is that in the short term it will not be as accurate as production based accounting.

5. Is there any evidence of industry relocating from the UK to other countries as a result of UK climate change policy? 5.1. Most of the UK cement producers are owned by global companies with head offices outside of the UK. These companies have closed plants in the UK in recent years and issued announcements6 that investment is being put on hold because of increased pressure from carbon taxation. This is at the same time that imports of cement are increasingly made up from companies that do not manufacture in GB. The amount of cement imported by companies that do not have cement manufacture in GB has increased dramatically over the period 2001-2010, as illustrated in Annex III. 5.2. Moreover, it is important that investors are not given the signals that it is acceptable to invest in less carbon constrained nations and import goods into the UK. At a time when economic growth is vital to the UK economy the signals for investors are of paramount importance.

6. Would it be (a) desirable and (b) practicable for the UK to adopt emissions reduction targets on a consumption rather than production basis? 6.1. (a) It is certainly desirable, primarily for those companies that are vulnerable to carbon leakage and that operate in the EU Emissions Trading Scheme. It is desirable because it would show that in many cases the climate change impacts of material consumption are increased by adding the transport emissions when the products are imported. 6.2. Furthermore it is desirable so that purchasers and specifiers of material use in the UK are aware of the additional carbon impact of transport and are encouraged to buy locally produced goods.

5 Portland Cement clinker is ground into a fine powder with added gypsum to form the cement product. Clinker can also be ground with other ‘cement-like’ by-products and waste to produce other cement types. 6 14th Feb 2008. Lafarge announce 1 billion investment hold in Europe citing carbon taxation as an uncertainty

Page 45 6.3. (b) At the macro level it is practical to adopt emission reduction targets based on consumption rather than production. Initially the data will not be as accurate but will still provide a truer picture of the UK’s climate change impact.

7. 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? 7.1. There is no reason why consumption based emissions accounting should create any negative implications at the international level. It will not create a barrier to trade but will make trade more sustainable with increased transparency. 7.2. International GHG accounting would have to remain on a production basis at the country level to ensure that there is no double counting.

8. Are there any other issues relating to consumption-based emissions reporting that you think the Committee should be aware of? 8.1. Consumption based emissions reporting will build understanding of the UK’s carbon footprint and allow carbon leakage of UK operations to less carbon constrained economies to be more closely monitored. It may also facilitate carbon based border tax mechanisms to address such distortions.

October 2011

Page 46

Annex I

2013 Estimated energy costs and environmental taxation for the manufacture of circa 7.5 million tonnes of cement using 2009 energy data

350

300

250 Carbon Price Floor (2013 price) CO2 at full purchase EUA's Carbon Dioxide (CO2) 200 Climate Change Levy

CO shortfall 2 Landfill tax on 45kt/year waste from Benchmark £million 150 allocation from 2013 CCL at Electricity cost full rate CCL at reduced rates from 2013 100 Fuel Cost (as coal equivalent)

50

0 Costs without free allocation and Costs with benchmarked free without CCL rebates allocation and CCL rebates

Page 47 Annex II

Page 48

Annex III

Percentage of GB Cement Total Imports by Non-Manufacturers 2001-2010

100

90

80

70

60

50 Percent 40

30

20

10

0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Year

Page 49 Memorandum submitted by E H Booth & Co Ltd (CON 12)

Executive Summary

1. At Booths we treat consumption-based carbon metrics for the business and its supply chains as essential management information which we require to guide our response to climate change.

2. Food is responsible for between 20% and 30% of the UK’s consumption-based greenhouse gas ‘footprint’. Much of this is imported and therefore missed off the UK’s production-based carbon metrics.

3. The UK food retail industry understands clearly that the majority of greenhouse gas emissions resulting from food take place on the farm. If our industry is to be supported in managing its climate change impact it is important that our own greenhouse gas metrics take this into account.

4. The current omission of net trade imports from UK greenhouse gas reporting prevents many of our existing and potential greenhouse gas mitigation actions from being reflected in the UK’s progress towards targets In order for our own efforts and narrative to be connected with the UK’s carbon metrics it is important that the UK adopts consumption-based accounting.

5. It is difficult to be accurate about greenhouse gas emissions from agriculture whether from a production-based or consumption-based perspective. Considerable scientific uncertainty exists for both approaches. However, the consumption-based approach is a more inclusive measure, making it more relevant for many purposes.

Consumption-based greenhouse gas metrics at Booths

6. For the last four years, Booths has adopted consumption-based greenhouse gas metrics for its operations and food supply chains. This is the primary emissions metric that we use to inform our business activities. We use this information to drive a coherent and integrated response to climate change throughout the business. We adopted a consumption-based approach because it became clear that production-based measures could not adequately reflect the climate change impacts of our management decisions.

7. Our estimates of the greenhouse gas ‘footprint’ of our operations and supply chains, along with a full list of mitigation actions is publically available on our websitei. Whilst this level of transparency is currently unique among UK supermarkets, it is clear that larger supermarket chains also take a consumption-based approach to greenhouse gasses from food. Tesco’s food label initiatives and Marks and Spencers’ Plan A are well known examples.

8. Although we are one of the smaller UK supermarket chains, the resources required to develop consumption-based metrics have been relatively modest. The key has been to ensure transparency over methodology and uncertainties. In order to obtain high quality

Page 50 management information it has not been necessary to undertake detailed process-based life cycle analysis of a large number of products.

Food production and consumption are important parts of the UK’s climate change impact

9. Food is widely cited as being responsible for around 20% of the UK’s greenhouse gas footprint, when estimated on a consumption basis. Only a minority of this is attributable to UK cooking and food disposal. A clear majority of food emissions take place prior to the farm gate. Processing, packaging and transport are also significant componentsii. As well as our own work, numerous academic papers support this braod perspective. Although no other UK supermarket has yet published comprehensive estimates, the narrative of the larger UK supermarkets shows that this is well understood within the industry.

10. A recent WWF report estimates that the 20% figure for the relative importance of UK food consumption rises to 30% when the effects of international changes in land use resulting from UK food imports are taken into account.iii

The significance of UK net food imports

11. The UK imports around half of its food, probably accounting for between 50 and 100 million tonnes of carbon dioxide equivalent per year. We know from extensive secondary research that some of the foods we import are more carbon intensive than their UK alternatives, but that some are less so. Examples of greenhouse gas intensive imports include air-freighted foods, foods that are hot-housed in cold climates (such as Dutch tomatoes in January), those grown using unnecessarily high levels of fertilizer (including, for example, much rice production), and those whose production necessitates deforestation. Examples of low impact imported foods include many of those grown in season and in sunny climates and transported by sea.iv

12. For the most part, UK outdoor food production is relatively greenhouse gas efficient compared to most overseas alternatives as a result of high environmental standards, high industry knowledge and high energy costs. There is strong potential to reduce greenhouse gas emissions resulting from UK food consumption through greater selectivity over our food imports. This is likely to favour the UK food industry. National and international consumption-based greenhouse gas accounting is required to reflect the emissions benefits.

The importance of consumption-based metrics.

13. At Booths we understand that greenhouse gas management involves addressing every area in which we have influence on the emissions resulting from food consumption.

14. However, the current omission of net trade imports from UK greenhouse gas reporting prevents many of our existing and potential greenhouse gas mitigation actions from being reflected in the UK’s progress towards targets. The same will be true for all other UK food retailers. This disconnection between the most effective food industry greenhouse gas mitigation measures and national greenhouse gas accounting currently brings a significant element of incoherence and inefficiency to the UK’s response to climate change. It is important that this is resolved through the adoption of consumption-based national greenhouse gas accounts.

Page 51

Practical considerations

15. Scientific uncertainty over greenhouse gas emissions from agricultural practices ensure that both production-based and consumption-based food greenhouse gas emissions estimates contain considerable uncertainty. Practical management of the issues necessitates a pragmatic approach to the development of ‘good enough’ management and policy information whichever approach is adopted at a UK level. This uncertainty does not in any way negate the value of adopting a consumption-based measure.

16. We do not believe it is particularly useful or practical and certainly not necessary to attempt process-based life cycle analysis of a very large number of products in order achieve robust consumption-based estimates of greenhouse gas emissions from UK food consumption. Our own work demonstrates the feasibility of a modelling approach.

17. A critical enabler of the provision of a robust methodology within realistic resource constraints will be the transparent acknowledgement of the uncertainties. The methodology and datasets can be improved over time.

Further Information

18. Our consumption-based greenhouse gas footprint report, including methodology and a full list of mitigation actions can be found at http://www.booths.co.uk/Documents/Booths_Full_Report_100720.pdf

October 2011

i Booths 2010 ‘The Greenhouse Gas Footprint of Booths’ http://www.booths.co.uk/Documents/Booths_Full_Report_100720.pdf ii Audsley, E., Brander, M., Chatterton, J., Murphy‐Bokern, D., Webster, C., and Williams, A., (2009) ‘How low can we go? An assessment of greenhouse gas emissions from the UK food system and the scope to reduce them by 2050’. FCRN‐WWF‐UK. http://assets.wwf.org.uk/downloads/how_low_report_1.pdf.

iii Audsley, E., Brander, M., Chatterton, J., Murphy‐Bokern, D., Webster, C., and Williams, A., (2009) ‘How low can we go? An assessment of greenhouse gas emissions from the UK food system and the scope to reduce them by 2050’. FCRN‐WWF‐UK. http://assets.wwf.org.uk/downloads/how_low_report_1.pdf. iv Garnett, T. (2006) Fruit and vegetables & UK greenhouse gas emissions: Exploring the relationship. A report for the Food Climate Research Network http://www.fcrn.org.uk/sites/default/files/fruitveg_paper_final.pdf

Page 52 Memorandum submitted by Green House Think Tank (CON 13)

Summary

This contribution aims to challenge the inquiry to address a number of the consequences of separating production from consumption emissions ‐ and the need for consumption to be re‐connected to sustainable resource management at the point where exploitation occurs (production) and where decision‐making to increase consumption occurs (consumption, procurement). The main points made in this submission are:

‐ to measure consumption as well as production emissions totals nationally, so track the growing 'carbon emissions gap' between production and consumption in the UK

‐ the consumption‐based approach should extend beyond individuals to better breakdown and influence corporate procurement decisions in terms of CO2 emissions

‐ measurement of embodied carbon needs validation by government (rather than just official data for scope 1 and scope 2 emissions calculations)

‐ better exploration of the links between embodied and direct/electricity CO2 consumption should inform policy choices, including areas such as infrastructure provision and housing policy.

‐ introduce a carbon emissions reduction hierarchy, with a legal priority to put carbon emissions reduction before supply side (e.g. zero/low carbon technology) measures.

‐ evaluate how financial incentives (e.g. for renewable energy) is increasing rather than reducing emissions and ensure that in shifting to minimise overall CO2 consumption as well as UK‐based production other perverse incentives against action on climate change are addressed.

1. Some data highlighting the growing carbon‐gap between UK production and consumption of carbon emissions.

Suggest contrast the figures as set out by Defra, WWF and Christian Aid. The former (Defra) measures emissions within the UK. WWF (Counting Consumption, 20061) measured consumer emissions. Christian Aid (Coming Clean: Revealing the UK’s True Carbon Footprint, 20072) considered the impact of considering emissions which relate to UK economic growth, which includes repatriation of emissions associated with UK businesses that return profit to the UK. The UK’s overall consumption‐based footprint is larger than the Defra measure of CO2 emitted in the UK, and is still increasing.

1 http://www.wwf.org.uk/filelibrary/pdf/countingconsumption.pdf. 2 http://www.christianaid.org.uk/Images/coming‐clean‐uk‐carbon‐footprint.pdf

Page 53 This is reflected in the Capital Consumption Report (BioRegional, 20093) which analyses how London could widen its climate change action plan from CO2 emissions in London (production) to the total CO2 footprint of Londoners (consumption). London’s consumption footprint is over twice as large, rising 19% to 330 Mt CO2 from 1990 to 2003, while the production of CO2 in London fell by 8.5% to 161 Mt CO2 over the same period.

In the same way as Richard Murphy's research indicates a £120b tax gap in the UK, the above figures set out a growing CO2 emissions reporting/ responsibility gap. Globalisation of finance, but national/regional (EU) carbon pricing, legislation and other financial incentives make it cost‐effective for the UK to relocate manufacturing overseas ‐ saving money and tax, saving CO2 emissions and reporting ‐ but returning financial and consumption benefits to the UK.

In 2002, under the implementation plan of the World Summit of Sustainable Development in Johannesburg, the UK and other developed countries committed to decouple carbon emissions from economic growth. This led to the formation of the Sustainable Production and Consumption Plan4 but this does not appear to have impacted upon energy and climate impact measurement or reconsidering how this might lead to a widening of actions in the pathway to a low carbon economy5.

We urge the Energy and Climate Change Committee to require the full consumption and economic‐benefit carbon footprints of the UK to be reported and published alongside the current Defra production footprint, for the UK’s carbon reduction commitment to plan and take responsibility for these wider footprints to be reduced, and in doing show demonstrate leadership in the 2002 commitment made to decouple carbon emissions and other environmental impacts from economic growth.

2. The focus on consumption should include consumption (rather than just direct CO2 production) by corporations, including their procurement. This extends the consideration of a consumption‐led approach beyond individuals.

The focus of carbon footprinting tends to be on personal emissions and direct emissions by corporations and the public sector. This is termed scope 1 and scope 2 emissions and tends to exclude scope 3 emissions6, which is embodied carbon in products. This means that our current process tends to exclude procurement and supply‐chain compliance (such as proposed by Sig Sixma7 in big businesses and by the flexible framework as best practice in the public sector8, as set out in the Sustainable Procurement Task Force report to government in 20079).

This has the effect that shared responsibility is rarely considered in corporate or public sector decision

3 http://www.bioregional.com/files/publications/capital‐consumption.pdf. 4 For example see http://www.defra.gov.uk/publications/files/pb13513‐ep‐scp.pdf. 5 http://www.decc.gov.uk/publications/basket.aspx?FilePath=White+Papers%2fUK+Low+Carbon+Transition+Plan+ WP09%2f1_20090724153238_e_%40%40_lowcarbontransitionplan.pdf&filetype=4#basket. 6 http://www.ghgprotocol.org/calculation‐tools/faq. 7 http://en.wikipedia.org/wiki/Six_Sigma. 8 http://www.actionsustainability.com/evaluation/flexible_framework. 9 http://www.defra.gov.uk/publications/files/pb11710‐procuring‐the‐future‐060607.pdf.

Page 54 making with respect to carbon. For example, responsibility for carbon in the construction sector is disaggregated with product manufacturers responsible for their emissions, and construction firms for on‐site energy use (but only through a voluntary agreement of the larger firms10, and no action amongst SMEs). This means that at the point of decision making (planning decision, outline design, detailed design) and procurement carbon is not a consideration. Planning decisions may have an implicit requirement to minimise carbon (see climate change supplement to PPS111) but this is not reflected in decision making.

One way of doing this would be to require full scope 1, 2 and 3 reporting for all major emitters, and business sectors, so that these sectors are required to set out how they will reduce emissions by 80% by 2050 (to inform business strategy) and what public legislative/incentives are required to create the level playing fields to enable this to happen. One example is the construction industry. Although this is responsible for at least 10% of UK emissions12, the government's current Strategy for Sustainable Construction13 has no targets for either measuring or reducing this total.

A much cited reason to avoid this approach, which is to focus on decision‐making (which means that it is delegated up procurement supply chains, but the responsibility is retained by decision‐making at all levels, is that this might lead to double counting. Instead it might make the disaggregation of carbon emission data easier. If all companies reported scope 1, scope 2 and scope 3 emissions then all could take full responsibility for their total emissions, and the ways in which these different categories of emissions computed would allow the total emissions, or cumulative build‐up of emissions along a supply chain, or within a sector based on resource‐based footprinting to be visible, so able to be planned to be reduced. Also, this avoids the tendency for emissions due to trading to be discounted in current approaches. International trade tends in goods tends to lead to disagreement (e.g. Copenhagen climate talks) as to whether emissions are the responsibility of the producer OR consumer, while ignoring the emissions due to transport of goods and people between countries. It is possible to share transport emissions between countries (e.g. 50% of emissions of each flight/shipping movement allocated to each airport/port). Likewise, it is possible to choose to share emissions between supplier and consumer. However, if carbon emissions reduction is to be targeted (see section 5 below) then consideration to a ‘consumer‐pays’ approach should be considered. Thus, if a product travels further and is produced in a less energy efficient manner (e.g. using coal‐fired electricity in China rather than hydro‐power in the UK) this should be reflected in the product carbon footprint. Locating the footprint with the consumer allows the consumer to choose based on carbon emissions. If it is located with the producer then the consumer relies on the carbon of production to be limited through global regulation, which does not exist (and was excluded from many resource extraction/global manufacturing companies in the Kyoto agreement, which limited curbs on climate emissions to Annex 1 countries).

We urge the Committee on Energy and Climate Change to consider how businesses and public sector/NGOs can take full account of their carbon emissions as consumers, including procurement and capital expenditure decisions.

10 http://www.strategicforum.org.uk/targets.shtml. 11 http://www.communities.gov.uk/publications/planningandbuilding/ppsclimatechange. 12 http://www.bis.gov.uk/assets/biscore/business‐sectors/docs/l/10‐1266‐low‐carbon‐construction‐igt‐final‐ report.pdf, Figure 2.3. 13 http://www.bis.gov.uk/files/file46535.pdf.

Page 55

3. Measurement of Embodied Carbon ‐ source data needed to be validated and approved by government.

Most carbon calculators which extend from scope 1 and 2 to include product embodied carbon in the UK use data produced by Craig Jones at Bath University in his Inventory of Carbon and Energy14. In comparison Defra only published figures which relate to direct (scope 1 and 2) emissions15. This has been updated to take on board industry confirms, but is unregulated, is not rigorous with regard to LCA boundaries and international data/location of product. Neither does it consider the impact of depletion of ecosystems (e.g. deforestation, mining of rare earth metals) on climate change, or extend from materials to set out embodied carbon of the full range of consumer products used by individuals, public sector and business in the UK. As a result of the lack of data for bottom‐up, resource‐based calculations much carbon footprinting analysis relies on 'input‐output data' (such as by the REAP database produced by SEI), which breaks down overall emissions based on financial data. However, this approach directly 'links' economic impact to carbon emissions, so does not enable any exploration of how these two might be decoupled, as we transition to a zero carbon future, with a sustainable economy. We need to remove commercial confidentiality constraints on sharing of carbon impacts on product data so we can better measure and therefore manage our carbon reduction plans nationally.

We urge the Energy and Climate Change Committee to commit the government to widen its conversion factors to include materials and a full range of consumer products to enable all consumption emissions to be calculated and compared with a common dataset, updated – and linked via input‐output data to reflect overall UK consumer emissions.

4. Much embodied carbon in the UK is imported and traded, and is not currently counted in the UK production‐based carbon footprinting. But as well as counting it, the relation between embodied carbon (scope 3) spend and subsequent (scope 1 and 2) direct/purchased energy consumption should be clearly explored. Examples of how increased capital consumption of embodied carbon leads to downstream/ongoing carbon emissions and energy use are as follows: ‐ Spending 56‐70 T CO2 to build a new house ‐ Spending 4‐9 T CO2/m of new dual carriageway (not including associated structures) tends to encourage more transport movements, which have CO2 emissions). ‐ Spending carbon on a new airport building or runway leads to more flights ‐ Spending on a new car manufactured in the UK is likely to increase miles driven ‐ Spending money on a larger TV, or additional ICT will increase electricity used.

There is a need to consider how the additional CO2 emissions of consumption over production (embodied CO2 of what we build and buy) is both considered in our planned responsibility carbon footprint that we need to reduce, and also how this currently tends to drive up operational emissions across all sectors (e.g. building heating, electricity, transport, waste through packaging and built‐in‐obsolescence).

14 http://www.bath.ac.uk/mech‐eng/sert/embodied/. 15 For example, see http://archive.defra.gov.uk/environment/business/reporting/pdf/110707‐guidelines‐ghg‐ conversion‐factors.pdf.

Page 56 Exceptions to do this could be termed 'development towards sustainability' where scope 3 emissions lead to reduced scope 1 and 2. Home retrofit is an example where this could apply ‐ by making improvements to existing housing stock, insulation is improved and home energy use falls. But in the past retrofit (such as the enveloping programmes of the 1980s16) did not set out to reduce carbon emissions, but fuel poverty. In fact, since 1971 to 2007 carbon emissions in UK households have increased in line with housing numbers, with the total per house remaining around the same, instead leading to the average room in the average house in the UK being 7C warmer than in 1971. Therefore, retrofitting (previously called insulation, enveloping and introducing central heating) have supported increased consumption overall, rather than reduction in carbon emissions. This, together with the trend in hybrid car drivers travelling further, resulting in increase rather than reduction in overall CO2 emissions is called the Rebound Effect (see Sorrell, Energy Efficiency and Sustainable Consumption, 200817). This book also highlights how complete rebound has occurred with increased overall CO2 emissions due to lighting and computing, even as both have become more energy efficient: the increase in energy efficiency has driven economic growth rather than led to lower levels of energy consumption.

We urge the Energy and Climate Change Committee to propose an SEA is conducted on the way consumption drives up productive emissions.

5. Proposal ‐ Introduction of a Legal Priority Order for Energy and Climate Change.

On 29th March 2011 the UK government enacted the EU Waste Framework Directive, which made the new waste hierarchy a legal priority order in the UK (http://www.legislation.gov.uk/ukdsi/2011/9780111506462/contents). There is currently no similar priority order for carbon emissions reduction. As described by Sorrell (2008) focuses on energy efficiency is likely to rebound and increase CO2 emissions unless consumer (demand) for carbon intensive living is not also curbed.

But UK investment on tackling climate change is increasingly focused on technology. In 2010 Defra’s funding was cut by 40%, while spending on the Technology Strategy Board was increased. Focus on low (e.g. nuclear) and zero‐in‐use (e.g. wind and other renewable) technologies, without associated value and behavior change is likely to drive economic growth and re‐bound with higher carbon emissions (which will either partially offset efficiency savings through increased throughput, or generate increased throughput by expanding capital and consumer assets).

Energy and carbon emission reductions can be achieved with technology change. However, globally we are using 50% more resources each year than the planet can sustain (WWF, Living Planet Report, 201018). There is a need to ensure technology changes are linked to behavior changes, so both work together to reduce the carbon emissions of consumers (Common Cause, WWF, 201019).

16 For example, see e.g. http://openlibrary.org/works/OL10745340W/The_City_of_Birmingham_envelope_scheme. 17 http://www.palgrave.com/products/title.aspx?pid=353285. 18 http://wwf.panda.org/about_our_earth/all_publications/living_p lanet_report/2010_lpr/. 19 http://www.wwf.org.uk/wwf_articles.cfm?unewsid=4224.

Page 57 We urge the Energy and Climate Change Committee to propose a mechanism to introduce a carbon emissions and energy reduction hierarchy for the UK, and associated legislation and incentives so that measures drive down overall reductions, rather than rebound through increased consumption in the UK or overseas.

6. Review Renewable Energy and other incentives – to ensure they consider consumption impacts

In light of the new Waste Hierarchy, and empirical evidence, that the government might consider reviewing the ROC and other subsidies to make sure that policies aim at increasing renewable energy tend to reduce climate emissions. In particular, generation of electricity from burning waste (and biomass) has an overall negative impact on CO2 emissions, when this displaces reduce/reuse/recycling and sustainable use of renewable resources (timber).

For example, burning timber looks like a good way of reducing the production emissions in the waste sector, but taking a wider consumption focused perspective will note the loss of carbon dioxide through: - Not retaining the benefits of the ‘already spent’ (embodied) CO2 emissions in the forestry and sawmill process, kiln drying, product manufacture and distribution of a timber beam or wooden pallet to a construction site. Reuse saves this carbon dioxide from another product to be made from virgin resources. - Not retaining all of the sequestered carbon in the timber itself, as conversion efficiencies vary from as low as 14% for MSW incineration to 80% for CHP/biomass heating systems. The 20‐86% loss is direct CO2 emissions. But reuse and recycling (and some composting) will retain all of this CO2. - Not retaining the resource value and financial value in the product. Focusing expenditure on plant and machinery (which produce CO2) rather than sorting, repair and remanufacture which are lower‐carbon per person employed. - Importing timber from overseas means incurring CO2 emissions in forestry and transportation elsewhere and claiming a benefit for those emissions produced elsewhere when they are consumed in the UK. This is not only carbon offsetting, but can act as an increased driver for deforestation as it increases the overall level of timber exploitation globally, which creates a loss in ecosystem quality and global sequestration capacity. It is also increasing the market price for timber in the UK, which further disincentivises the less carbon and resource intensive alternatives of reuse and recycling set out above. This is meeting UK renewable energy targets in a way that increase CO2 emissions. Consumption based CO2 reporting, considering overall emissions is needed to avoid this perverse policy incentive.

The ROC review process undertaken by DECC20 is due to report in late 2011, and is likely to need parliamentary scrutiny. With this in mind the following abnormalities that increase overall (consumption) CO2 emissions are highlighted:

It is inappropriate for new waste incinerators (i.e.pyrolysis and gasification plants) to continue to receive double ROCs: the same level subsidy as offshore wind farms. This subsidy allows consumption impacts to be sustained, to cut production emissions. This is contrary to the new UK waste hierarchy, which argues that the waste hierarchy must be followed as a legal priority order. Therefore, this acts as a perverse incentive against waste reduction, reuse and recycling – which all reduce total consumption CO2 footprint. As a result the current ROC subsidy for domestic incineration (which is in effect a cross‐subsidy on commercial incineration as many plants do not restrict their offtake market to MSW) backfires, and increases CO2 emissions in this

20 http://www.decc.gov.uk/assets/decc/What%20we%20do/UK%20energy%20supply/Energy %20mix/Renewable%20energy/policy/renew_obs/1_20100331174250_e_@@_RObandingre viewprocess.pdf.

Page 58 area. Therefore, the current ROCs subsidies provide perverse incentives that tend to drive expenditure under some PFI agreements [which also receive government subsidy in the form of PFI credits] that go against both i) delivering annual reductions on climate change emissions under the Climate Change Act; and ii) results in developments that are not the Best Practicable Environmental Option (BPEO) at the planning stage, which is against the addendum on climate change to Planning Policy Statement 1 and may also fall foul of EIA and/or SEA regulations.

So, it is inappropriate for construction waste that was previously reused and recycled to be incinerated. However, this is incentivized by both the ROC and proposed Renewable Heat Incentive (RHI) subsidies. It has resulted in a reduction of reuse of construction timber (and other products) with a negative carbon impact (See Pushing Reuse, BioRegional, 200921).

The new EU Waste Framework Directive was transferred into UK legislation in the form of the Waste Regulations (29 March 2011). This requires waste prevention, reuse and recycling to be incentivized before recovery and disposal as a legal priority order. PFI, ROC and RHI subsidies should not lead to investment in energy recovery (e.g. biomass plant) or waste disposal (e.g. gasification plant) where material would otherwise be reused or recycled. As reuse does not currently receive any separate subsidy in the UK the level of reuse is generally affected by the market price for virgin material, as this is what it competes against (in contrast recycled aggregate has a small incentive over virgin aggregates due to the aggregate levy). If subsidy for burning biofuels or municipal waste or imported biomass distorts the market price for UK industries such as timber production it may impact our resilience in terms of supply of forestry wood for UK use in the UK, as well as reuse ‐ because of an incentive designed to apply to timber (imports) for burning.

Therefore, as the costs of the forestry and waste sectors will not have changed this could provide greater subsidy for the forestry sector to produce a lower value outcome and reduce employment (energy rather than product from our forests, as well as energy rather than product from our wood waste streams). So, by subsidising the bottom of the waste hierarchy, we have paid money to reduce our sustainability and also to fail to correctly apply the waste hierarchy, which is legal priority order under EU law.

Therefore, we urge the Energy and Climate Change Committee to challenge perverse financial incentives that increase overall CO2 emissions, which seeking to improve waste treatment or generate renewable energy (particularly ROC, RHI and PFI credits). The wider point, is that environmental subsidies need to be looked at systemically rather than in isolation, with energy policy (DECC), industrial and business policy (BIS) and resource management policy (Defra) looked at together, rather than developed in parallel.

October 2011

21 http://www.bioregional.com/news‐views/publications/pushing‐reuse/.

Page 59

Memorandum submitted by the British Ceramic Confederation (CON 14)

Executive Summary

• A consumption-based measuring approach would provide a more realistic picture of the UK’s emissions performance, which could provide a “level playing field” for business and reduce carbon leakage. It would also help to ensure that total global emissions decrease by ensuring that UK emissions reductions are actual reductions, rather than merely exports.

• Many of our members have foreign parent-companies and must compete internally for investment in UK plants. Many report that this funding is being delayed or withheld in the UK due to the current UK climate change regulatory climate.

• We want to keep energy efficient manufacturing here in the UK. With the wrong policies we simply export jobs and import carbon. The Environmental Audit Select Committee has very sensibly recognised that the UK’s targets are flawed as they are based on emissions produced in the UK, and exclude emissions embedded in goods imported from abroad1.

• Assessments of the UK’s total greenhouse gas emissions would increase when measured on a consumption, rather than a production basis.

• The change in the UK’s total greenhouse gas emissions over recent years would have been an increase rather than a decrease, if consumption-emissions had been measured.

• It would be possible to develop a methodology for measuring consumption-emissions; however its effectiveness would depend on consistent and fair calculation of imported emissions, which in turn may depend on the accuracy and integrity of data provided by foreign importers / manufacturers.

• Transport emissions should be included in the embedded emissions of imported goods.

• It would be desirable to adopt emissions reduction targets on a consumption rather than production basis; however its practicality and success would strongly depend on the methodology’s consistency and robustness.

• At the international level, consumption-based reporting in the UK may encourage other countries to do the same. This would further decrease global emissions. It could also provide an incentive to countries in regions where there is little or no climate-change legislation, to improve their environmental performance, in order to remain competitive in their (UK / European) export markets.

Brief Introduction to the British Ceramic Confederation

1. The British Ceramic Confederation (BCC) is the trade association for the UK Ceramic Manufacturing Industry, representing the common and collective interests of all sectors of the Industry. Its 100 member companies cover the full spectrum of products and materials in the supply chain and comprise over 90% of the Industry’s manufacturing capacity.

2. Membership of the Confederation includes manufacturers from the following industry sectors:-

ƒ Gift and Tableware ƒ Floor and Wall Tiles ƒ Sanitaryware

ƒ Bricks ƒ Clay Roof Tiles ƒ Clay Pipes

ƒ Refractories ƒ Industrial Ceramics ƒ Material Suppliers

1 http://www.publications.parliament.uk/pa/cm201012/cmselect/cmenvaud/1080/1080.pdf (accessed 19/10/2011)

Page 60 3. The industry is energy-intensive (but not energy inefficient): energy bills / taxes can be up to 30-35% of total production costs. 85% of the energy used is natural gas. BCC is a member of the Energy Intensive Users Group, which supports cost-effective action to reduce global greenhouse gas emissions. Factual information Export of manufacturing

4. Our members in the UK have some of the most energy efficient and environmentally regulated factories in the world. Many have made significant investments in the last decade. For instance, two of our tile manufacturers have spent over £40M each overhauling their factories installing heat recovery and fast- firing energy efficient kilns. 5. Competition is currently distorted because less stringent, or non-existent climate-change regulation elsewhere in the world gives manufacturers in those regions a competitive advantage in the UK market, resulting in the export of manufacturing and carbon from the UK, and the import of goods to the UK (“carbon leakage”). If manufacturing in these regions is less efficient then global emissions increase. 6. Many of our members have foreign parent companies and must compete internally for investment in UK plants. Many have reported delays or withdrawal in funding due to the UK regulatory climate. 7. Being energy-intensive companies, much of the withheld investment would have been in measures that would have improved energy efficiency and reduced greenhouse gas emissions. 8. A consumption-based approach to measuring the UK’s emissions would reduce carbon leakage by reducing the competitive distortion experienced by UK manufacturers. This would create a fairer and more level playing field for manufacturers to compete. 9. If more products were produced domestically, the UK’s total consumption emissions would decrease due to decreased transport emissions and efficient manufacturing. 10. Consumption-based measurements would provide a true picture of UK emissions by ensuring that an apparent decrease in the UK’s emissions is a genuine decrease rather than a simple export of emissions that does not get counted.

UK emissions rise when measured on a consumption rather than a production basis

11. An otherwise-identical product would have a larger carbon footprint if manufactured outside the UK and imported, due to transport emissions. 12. The volume of UK imports has been and is increasing, which means that UK consumption-based emissions are likely to be increasing, even though measurements on a production-basis suggest that they are falling2. 13. The Environmental Audit Select Committee concluded (recommendation 6, paragraph 31) in their report on the 4th Carbon budget1, “We do not share the Secretary of State’s reluctance for monitoring consumption emissions. Monitoring UK emissions on a consumption basis would facilitate a more rigorous approach to controlling our contribution to climate change. The Government should request the Committee on Climate Change to review the scope for measuring emissions on such a basis and how that might be worked into the carbon budgets regime, if necessary to complement the continuing production-based reporting needed internationally”.

Methodology for measuring consumption-emissions

14. A fair and consistent method for assessing consumption emissions should be adopted in order to provide a complete picture of UK and global emissions, and reduce the competitive distortion experienced by UK manufacturers. 15. Different approaches could be taken, depending on the accuracy and robustness required, and the quality of the underlying data. 16. The Carbon Trust has performed this work before, using a combination of two methodologies3. This approach includes transport emissions. 17. The report used an environmentally extended bilateral trade (EEBT) model where necessary3. This method adjusts the traditional production-based view of emissions to account for the import of emissions embodied in trade with direct partners (the emissions embodied in traded goods are subtracted from the total emissions of the producer country and added to the total emissions of the consumer country). It still

2 Examples with references can be found in: http://www.bbc.co.uk/news/science-environment-13187156 (accessed 19/10/2011) 3 http://www.carbontrust.co.uk/policy-legislation/international-carbon-flows/global-flows/pages/background.aspx (accessed 19/10/2011)

Page 61 total emissions of the producer country and added to the total emissions of the consumer country). It still underestimates total emissions, as it does not consider emissions further upstream (e.g. raw materials sourced from another country). The study found that this approach estimated UK consumption-based emissions to be 25% higher than those produced domestically in 2004. 18. A multi-regional input-output (MRIO) approach was used wherever possible and practical3, as it provides the greatest accuracy. This approach attempts to provide a fully re-allocated view of global emissions by recursively including embodied emissions throughout the supply chain. The study found that this approach estimated UK consumption-based emissions to be 34% higher than those produced domestically in 2004.

Practicality and international effects

19. Measuring emissions on a consumption rather than a production basis would help with the UK’s balance of payments and economic growth, as one of the competitive disadvantages of manufacturing in the UK would have been reduced. This would also make manufacturing investment in the UK more attractive. 20. Internationally, consumption-based reporting could encourage other countries to adopt this approach, which would lead to lower total global emissions, with the UK seen as the leader of these reductions. 21. Further global emission reductions could be achieved as consumption-based reporting would eventually encourage manufacturers in regions with little or no climate-change regulation to improve their environmental performance in their UK / European export markets. Recommendations

22. Emissions should be measured on a consumption rather than a production basis.

23. Assessments or estimates of embodied emissions should include transport emissions.

24. Assessment or estimation methodologies should be simple, transparent, and consistently applied. The approach should be low-cost to implement in terms of direct financial costs and administrative burden.

25. Assessment or estimation methodologies should be tolerant to a reasonable proportion of incomplete or inaccurate data, for instance by adopting a “standard” emission factor for each type of product or stage in the process where an omission is identified.

October 2011

Page 62 Memorandum submitted by University of Surrey (CON 15)

Summary • Consumption‐based GHG emissions increased by 7% between 1990‐2004, whereas on a production basis they fell. • A robust methodology for consumption accounting is possible but robust datasets are not yet available. The UK should take a proactive role in developing and standardising robust datasets. • Consumption and production based approaches should be adopted in parallel – taking either approach on its own would be a mistake. • The main benefits of the consumption basis are that it provides a more complete picture of the UK's carbon exposure, it is arguably a more equitable form of sharing responsibility for carbon emissions, and it acknowledges in a more complete way the UK's historical contribution to climate change • The main disadvantage of consumption based targets is the limited control that the UK has on emissions that arise abroad. • There is a danger that pursuing one or two indicators at the expense of other issues (such as water) can have unexpected and undesirable consequences.

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

1. The difference between assessment of the UK’s greenhouse gas (GHG) emissions when measured on a consumption basis rather than production basis is illustrated in Figure 11. UK emissions from the production perspective as reported to the UNFCCC2 for the purposes of the Kyoto Treaty are shown on the lower (pink) line. Accounting in this way shows that UK GHG emissions were 15% lower in 2004 than they were in 1990. UNFCCC reporting excludes emissions due to international aviation and shipping. When these emissions are added to give us a more complete estimation of emissions from the production perspective, emissions are just 9% lower in 2004 than they were in 1990, as shown by the green line marked “Production perspective (according to Environmental Accounts)”.

1,000

900

800

700

600 Consumption perspective

Production perspective (according to Environmental 500 Accounts) UNFCCC reporting

400 GHG emissions GHG (mtCO2 equiv)

300

200

100

0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Figure 1: UK GHG emissions according to different accounting perspectives. Source: Druckman and Jackson (2009b)

2. The graph shows that a marked difference is visible when we compare production perspective emissions with emissions from the consumption perspective (shown in the black line in Figure 1): consumption perspective emissions were 854mtCO2e in 1990, they fell to around 759mtCO2e in 1995, but since 1995 the trend has been rising, so that by

1 This is estimated using the Surrey Environmental Lifestyle MApping (SELMA) framework (Druckman and Jackson 2009a; Druckman and Jackson 2009b). 2 United Nations Framework Convention on Climate Change.

Page 63 2004 consumption perspective emissions had reached around 914mtCO2e ‐ an increase of about 7% over 1990 levels. Moreover, between 2000 and 2004 the rate of increase was around 3% per annum.

3. The difference between the production perspective and the consumption perspective is known as the ‘GHG trade balance’. A positive GHG trade balance confirms the hypothesis that a country’s consumption patterns are creating a ‘pollution haven’ effect abroad: in other words that the country is ‘exporting’ energy‐intensive industries and importing the semi‐finished or finished consumer products demanded by UK lifestyles. The graph shows that the GHG trade balance increased from 6% (45mtCO2e) in 1990 to 24% (179mtCO2e) in 2004 and therefore that the UK is effectively creating a pollution haven abroad.

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?

4. Estimating emissions on a consumption basis relies on having both robust methodology and robust data. The methodology used in this analysis (and other similar analyses) is known as Environmentally‐Extended Input‐Output (EEIO) and is well established (see for example Miller and Blair (2009)). Within EEIO methodology variations are possible with respect to how imports are accounted for. The simplest method is to assume that imported goods and services are produced using the same technology as the UK technologies, this is known as the Domestic Technology Assumption (Druckman et al. 2008). The next simplest method is known as Quasi‐Multi‐Regional Input‐Output modelling: in this methodology the environmental intensity of goods is specific to each region in the model, but the ‘manufacturing recipe’ (as given by the Analytical Input‐Output tables) is assumed to be as in the UK (Druckman and Jackson 2009a). In full multiregional modelling the manufacturing recipe is specific to each country/region in the model. It requires more data than QMRIO modelling. There are basically two types of multiregional Input Output model: those that model trade flows between all countries/regions in the model, and those that only model trade flows between the country of focus and its trading partners. The methodologies are standard, but obtaining robust data is challenging, and the number of countries/regions modelled varies ‐ often due to data constraints.

5. Hence a key issue to consider is the robustness of datasets available for EEIO modelling. In essence three sets of data are required: • Analytical Input‐Output tables for the UK; • Environmental accounts for the UK; • Information on the GHG intensity of imports.

6. Analytical Input‐Output tables for the UK are produced by the Office for National Statistics (ONS). Until recently accurate consumption accounts for the UK could not be produced because the most recent tables released by the ONS had been for 1995. However, in the summer of 2011 the ONS released Analytical Input Output tables for the year 2005. It is imperative that the ONS commits to producing analytical input output tables on a regular basis (one dataset at least every five years).

7. The UK produces annual Environmental Accounts. In order to be used with the Analytical Input Output tables it is necessary to match the sector categories: the sector definitions used in the Environmental Accounts are different from those used in the Analytical Input Output tables and accuracy is lost in the cross matching process. The Environmental Accounts categorisation is more appropriate for GHG reporting and so, ideally, the categories used for the Analytical Input Output tables would match those used in the Environmental Accounts.

8. In order to estimate emissions embedded in imports to the UK it is necessary to have environmental and economic data for each of our importing partners. This relies on having Input‐Output tables and environmental accounts for each of our trading partners as well as information on trade flows. The standard database that has been used in multiregional Input‐Output modelling to date has been, generally, the GTAP database produced by Purdue University (Dimaranan 2006). There are several problems with using this database: firstly it is not designed for use in input output studies, and secondly the robustness of the data must be questionable because the dataset is collated from donated data for each country. As a reward for donating data, free access to the GTAP dataset is given. However, other

Page 64 organisations are now appreciating the importance of input output data and the OECD, for example, are working on producing Input Output tables that promise a more robust approach.

9. The selection of which database to use is important as it influences the results. So if international consumption‐based reporting were to be used in a formal sense then it would be important that all countries use an internationally agreed dataset (as well as, of course, internationally agreed methodology). That being said, however, evidence shows that use of different datasets with variations in methodology do not cause appreciable differences in findings, as shown in figure 2, which compares the results from various UK studies.

Wiedmann et al (2008b) Druckman and Jackson (this QMRIO study) Ahmad and Wyckoff (2003) Peters and Hertwich (2008)

900

800

700

600

500

400

300

200

CO2emissions prespective the consumption from (mtCO2) 100

0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Figure 2. Comparison of UK CO2 consumption perspective emissions from different studies Source: Druckman and Jackson (2008)

10. Figure 2 compares our results obtained using the QMRIO model by Druckman and Jackson with those from multi‐ regional studies of the UK by Wiedmann et al (2008) (for 1990‐2004), Ahmad and Wyckoff (2003) (for 1995) and Peters and Hertwich (2008) (for 2001). Wiedmann et al’s (2008) estimates are higher than those from other studies, whereas Ahmad and Wyckoff (2003) give the lowest estimate. Druckman and Jackson’s QMRIO model is predicted to under‐ estimate CO2 emissions due to use of the UK Leontief Inverse for all world regions, and comparison with the other studies generally confirms this. The trends shown by Wiedmann et al (2008) and our QMRIO study agree well. Both studies show the effects of the “dash for gas” 3 and economic downturn in the early 1990s. Following this period emissions are estimated by both studies to have risen fairly steadily. It is important to note that all of these studies confirm that, from a consumption perspective, UK GHG emissions have risen since 1990 rather than fallen as indicated in statistics reported according to the Kyoto protocol.

11. In conclusion, in our opinion it is possible to develop a robust methodology for measuring emissions on a consumption basis but at the moment robust datasets are not yet available. The UK should be ambitious in helping to develop international data standards for use in consumption accounting.

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

12. A key advantage of adopting consumption accounting is that this gives a more complete picture of the UK's carbon exposure: as the price of carbon rises globally, so we can expect the price of goods and services to rise in line with their carbon content. By being aware of carbon emissions from the consumption perspective and attempting to minimise them, the UK will be able to mitigate this risk. It will also of course be taking a greater responsibility for the carbon emissions attributable to UK consumption patterns.

3 See Druckman and Jackson (2009a).

Page 65 13. One disadvantage associated with taking a consumption‐based approach to GHG emissions accounting is that the UK Government and regulators do not have direct control over emissions that occur in other countries. Emissions embedded in imported goods can be classified into two types:

• Emissions embedded in semi‐finished goods and services imported into UK industry, which are then used in products purchased by UK final consumers. These emissions are companies’ ‘Scope 3’ supply chain emissions. Currently many companies do not even estimate their Scope 3 emissions, let alone try to minimise them. It is therefore imperative that progress is made towards companies accounting for, taking responsibility for, and minimising their Scope 3 emissions; • Emissions embedded in imported finished goods and services purchased by UK final consumers (households, government, and capital investment).

14. In some respects households can be considered as the ultimate final consumers as, in the final analysis, all economic activity ultimately serves households4. Therefore, as ultimate final consumers, households also arguably responsible for all emissions embedded in goods and services, regardless of whether they are embedded in semi‐finished or finished goods and services. However whereas households are generally aware of their emissions due to direct energy use (e.g. for space and water heating, lighting and appliances), they are much less where of the embedded emissions. As illustrated in Figure 3, embedded emissions account for over half of household emissions (around 55% in terms of CO2, and 62% in terms of GHGs (Druckman and Jackson 2009a; Druckman and Jackson 2009b). Of these emissions, the proportion that occurs outside the UK has risen from 33% in 1990 to 41% in 2004 (see Figure 4).

600

500

400 Embedded in goods & services Personal flights 300 Personal vehicle use Household direct 200

100 CO2 use by households (mtCO2) households by use CO2

0

0 3 6 0 3 94 97 04 99 992 99 9 995 99 9 999 00 002 00 0 1 1991 1 1 1 1 1 1 1998 1 2 2001 2 2 2

Figure 3. Trends in CO2 attributable to UK households 1990‐2004. Source: Druckman and Jackson (2009a)

15. It is, of course, hard for consumers to directly influence the quantity of carbon emissions embedded in their purchases. But it is, however, important that they become increasingly aware of these embedded emissions, and where possible (a) reduce their purchase of carbon intensive goods, and (b) exert pressure on government and companies to reduce embedded emissions.

4 Industries ultimately produce goods and services for household consumers, and all government and investment expenditure (such as expenditure on hospitals, education, roads and railways) is ultimately to serve households.

Page 66 45%

40%

35%

30%

25%

20%

15%

10% % % embedded GHG emissions due imports to

5%

0% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Figure 4: Percentage of embedded GHG emissions from imported goods Source: Druckman and Jackson (2010)

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

16. This question is phrased as an “either/or” question regarding consumption versus production accounting, but we do not think that should be a straight choice: both approaches are valid and they should be used in combination. Taking either production or consumption accounting targets alone would be a mistake. Figure 1 illustrates the inadequacy of adopting production‐based target only. However, adoption of a consumption‐based target could also produce sub‐ optimal results. This is illustrated by the case of Scotland, which, from the consumption perspective has CO2 emissions 46% higher than on the production basis (Turner et al. 2011). One of the reasons behind this is that Scotland exports electricity to the rest of the UK and, due to the renewable content of this electricity, the exported electricity is relatively low carbon. This illustrates that in some cases higher consumption‐based emissions compared to production emissions is not necessarily a “bad” thing as, in this case the local conditions in Scotland are more favourable for producing electricity from renewables than the local conditions in the rest of the UK. If renewable electricity was not exported from Scotland to the rest of the UK, the overall greenhouse intensity of the U.K.'s electricity supply would be higher, thus raising total GHG emissions. So rather than simply trying to optimise actions according to one indicator for another, it is best if decisions are made in each case according to local conditions with the overarching goal to minimise global GHG emissions.

17. In consideration of the practicality of adopting a consumption‐based reduction target, as explained above, consumption accounting is, arguably, a more appropriate choice if we want to understand emissions attributable to UK lifestyles. However, by their very nature, emissions that occur abroad in the production and distribution of goods and services for final consumption in the UK are at least partly under the control of foreign regimes, so we in the UK have less ability to control them. Although there are some strategies that could mitigate such impacts, in a globalised market economy targets for reducing emissions over which we have limited control is problematic.

18. Finally, as discussed earlier, the datasets to carry out robust consumption accounting are still lacking and therefore it is not practicable to adopt a formal consumption based target as yet. We advocate that the UK works towards adopting emissions reduction targets on a consumption basis in parallel with the production basis in future. Initially consumption accounts should be used as a more informal indicator.

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

19. An important aspect of international negotiations is that of trust. Although we do not advocate adoption of consumption accounting as an alternative to production based GHG emissions accounting, we do advocate production and consumption approaches being taken together. By including consumption‐based accounts, the UK would be seen to be appreciating a more equitable form of sharing responsibility for GHG emissions, and be acknowledging in a more

Page 67 complete way the UK's historical contribution to climate change. The UK has already shown world leadership by passing the Climate Change Act 2008, and it could again gain leadership by moving towards adoption of consumption accounting alongside production accounting.

20. As indicated above, datasets capable of providing a fully robust basis for consumption accounting at an international level are not yet available. In the light of this, there is a risk that introducing consumption‐based accounts into international climate negotiations at this stage might further complicate and stall progress. To mitigate this risk, the UK should take a proactive role in developing and standardising such datasets at the international level.

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

21. The danger with simple indicators such as carbon emissions (from either production or consumption perspective, or both) lies in their inability to take full account of complexity. There is a danger that pursuing one or two indicators can have unexpected and undesirable consequences. For example, GHGs are not the only issue we should be taking into account: arguably, for example, water and waste are also extremely important issues.

October 2011

References Ahmad, N. and A. Wyckoff (2003). Carbon dioxide emissions embodied in international trade of goods. Paris, France, OECD. Dimaranan, B. V., Ed(s). (2006). Global Trade, Assistance, and Production: The GTAP 6 Data Base Center for Global Trade Analysis, Purdue University, USA. Druckman, A., P. Bradley, E. Papathanasopoulou and T. Jackson (2008). "Measuring progress towards carbon reduction in the UK " Ecological Economics 66(4): 594‐604. Druckman, A. and T. Jackson (2008). The Surrey Environmental Lifestyle MApping (SELMA) framework: development and key results to date. RESOLVE Working Paper 08‐08, University of Surrey, Guildford, UK. Available from http://www.surrey.ac.uk/resolve/Docs/WorkingPapers/RESOLVE_WP_08‐08.pdf. Druckman, A. and T. Jackson (2009a). "The carbon footprint of UK households 1990‐2004: a socio‐economically disaggregated, quasi‐multiregional input‐output model." Ecological Economics 68 (7): 2066–2077. Druckman, A. and T. Jackson (2009b). Mapping our carbon responsibilities: more key results from the Surrey Environmental Lifestyle MApping (SELMA) framework. RESOLVE Working Paper 02‐09, University of Surrey, Guildford, UK. Available from http://resolve.sustainablelifestyles.ac.uk/sites/default/files/RESOLVE_WP_02‐09_0.pdf. Druckman, A. and T. Jackson (2010). An Exploration into the Carbon Footprint of UK Households. RESOLVE Working Paper Series 02‐10, University of Surrey, Guildford, UK. November 2010. Available from http://resolve.sustainablelifestyles.ac.uk/sites/default/files/RESOLVE_WP_02‐10.pdf. Miller, R. E. and P. D. Blair (2009). Input‐output Analysis: Foundations and Extensions. Cambridge, UK. 2nd revised edition, Cambridge University Press Peters, G. and E. Hertwich, G. (2008). "CO2 Embodied in International Trade with Implications for Global Climate Policy." Environmental Science & Technology 42(5): 1401‐1407. Turner, K., N. Yamano, A. Druckman, S. Jung Ha, J. De Fence, S. McIntyre and M. Munday (2011). "An input‐output carbon accounting tool: with carbon footprint estimates for the UK and Scotland." Fraser Economic Commentary Special Issue: Energy and Pollution. January 2011: 6‐20. Wiedmann, T., R. Wood, M. Lenzen, J. Minx, D. Guan and J. Barrett (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.

Page 68

Page 69 Memorandum submitted by the University of Stirling, Strathclyde, and Cardiff (CON 16)

Summary * The central distinction between emissions accounted under production and consumption based measures is the treatment of emissions embodied in trade flows. * Consumption based measures exclude emissions embodied in exports but include emissions embodied in imports. However, the latter are very difficult to identify. The work reported here uses preliminary data provided by the OECD. The OECD is working on an appropriate database for consumption based accounting, but this is still in the process of development. Most existing consumption accounting studies rely on data that are not in the public domain. * For Scotland and the UK as a whole, our research shows that consumption‐based, as against production‐based, accounting methods identify a significantly higher level of CO2 emissions. However, this is not the case for all UK regions: we calculate that Welsh emissions are lower under consumption based accounting due to the high emissions content of exports from the region. * It is important that any policy focus does not rely solely on production or consumption based measures, instead focussing on region‐specific aspects of emissions generation. For example, we find that Scotland is ‘punished’ in carbon trade balance terms by having adopted cleaner technologies in its export‐intensive electricity generation sector. * There are important issues concerning the incentives implied by adopting either production or consumption based accounting measures as the basis for emissions targets. For example, while production‐based measures may encourage importing of ‘dirty’ goods and services, consumption‐ based accounting may reduce incentives to ‘clean up’ domestic technology where production primarily serves export demands.

1. Introduction 1.1 The Fraser of Allander Institute at the University of Strathclyde, University of Stirling (under the ESRC Climate Change Leadership Fellowship, ESRC ref: RES‐ RES‐066‐27‐0029), and Cardiff University (ESRC BRASS Centre) wish to submit evidence to the enquiry examining Consumption Based Emissions reporting. In this evidence we address 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?

Page 70 • What are the benefits and disadvantages associated with taking a consumption‐based rather than production‐based approach to greenhouse gas emissions accounting?

In summary we show that in the UK and Scottish cases there are important differences between findings depending on the reporting principles adopted. We explain why this is the case, and then discuss policy issues resulting from the analysis. In this submission we do not expand on the methods that we develop and apply to produce the consumption‐based measures of emissions: details of these may be found in the references (below).

2. Accounting for Carbon Generation 2.1 A crucial issue affecting unilateral attempts to fulfil national emissions reductions targets under the Kyoto Protocol is the impact of international trade on domestic emissions generation. The basic problem is that emissions generated in producing goods and services to meet export demand are attributed to the producing nation’s emissions account. That is, pollution generation in any one country is partly driven by consumption decisions in others. In summary it is necessary to distinguish a ‘production accounting principle’ (PAP) and a ‘consumption accounting principle’ (CAP) in considering the structure of pollution problems.

2.2 Accounts constructed on the PAP focus on emissions produced within the geographical boundaries of the national economy. This is what is accounted for, and what individual national governments are responsible for reducing, under the Kyoto Protocol. In contrast, the latter, CAP, focuses on emissions produced globally to meet consumption demand within the national economy. This is what increasingly popular measures such as carbon footprints attempt to measure, and what many people regard as more appropriate, given that human consumption decisions are commonly considered to lie at the heart of the climate change problem. In an economy with no trade, total emissions calculated under both production and consumption accounting principles would be equal (by definition). Further, if accurate production and consumption accounts were calculated for all countries they should sum to the same world figure. Where there is trade and pollution is embodied in that trade through emissions generated in one region or nation to meet consumption demand in another, the CAP and PAP measures for individual regions or countries need not, and in general will not, be equal. A foreign ‘trade balance’ in pollution will exist in terms of the difference between total emissions estimated on the basis of the production and consumption accounting principles, or more simply, the difference between the pollution embodied in exports and the pollution embodied in imports.

Page 71 2.3 Thus, the question arises as to whether PAP and/or CAP measures should be used to monitor and track pollution generation at the individual country level and what, if anything, can be done about foreign ‘trade balances’ in pollution.

3. Summary Carbon (CO2 equivalent) Accounting Results for the UK and Scotland

Table 1. UK CO2 generation (2004) under different IO accounting principles

CO2 generated within UK 'carbon' (CO2) UK - PAP footprint - CAP Total CO2 attributed (millions of tonnes) 643.8 813.5

CO2 s upported by UK final cons umption

Domestic (UK) CO2 generation: Directly generated (households) 163.7 163.7 Indirect - generated in UK production sectors, supported by UK consumption 491.1 491.1 Total domestic emissions supported by domestic consumption 654.8 654.8

CO2 generated in UK supported by external (export) demands for UK production 152.7

External CO2 generation: Indirect CO2 embodied in imports supported by UK consumption 322.4

Implied CO2 trade balance (deficit):

CO2 embodied in exports minus CO2 embodied in imports (CO2 generation under PAP minus CAP) -169.7

3.1 Our findings, presented in Table 1, suggest that in 2004 the ‘carbon footprint’ of UK consumption at 813.5m tonnes of CO2 equivalent was significantly higher than the level of CO2 emissions generated within UK borders, which measured 643.8 million tonnes of CO2. That is, under CAP accounting, UK CO2 generation is 26% higher than under the PAP accounting measure that is the metric for the CO2 reduction targets under Kyoto. This implies that the UK ‘imports sustainability’ from its trade partners. This result might be expected in the case of an advanced economy whose domestic production has shifted from manufactured goods towards more service orientated activities, whilst increasing imports of manufactured goods. However, it raises questions as to whether PAP measures (as under the Kyoto Protocol targets) give an appropriate account of the sustainability of the UK economy.

Table 2. Scottish CO2 generation (2004) under different IO accounting principles

Page 72 CO2 generated within Scot 'carbon' (CO2) Scot - PAP footprint - CAP

Total CO2 attributed (millions of tonnes) 48.9 71.5

CO2 supported by Scottish final consumption

Domestic (Scottish) CO2 generation: Directly generated (households) 11.3 11.3 Indirect - generated in Scottish production sectors, supported by Scottish consumption: 25.5 25.5 Total domestic emissions supported by domestic consumption 36.8 36.8

CO2 generated in Scotland supported by external demands for Scotland production Demand from the rest of the UK 17.6 Demand from the rest of the world 5.8 Total domestic emissions embodied in exports 23.5

External CO2 generation: Indirect CO2 embodied in imports : Imports from the rest of the UK 19.8 Imports from the rest of the world 26.2 Total external emissions embodied in imports 46

Implied CO2 Trade Balance (Deficit):

CO2 embodied in exports minus CO2 embodied in imports (CO2 generation under PAP minus CAP) Rest of the UK -2.1 Rest of the world -20.4

Total carbon trade deficit -22.6

3.2 The Scottish results, on the other hand, are more complex. Scotland also ‘imports sustainability’, but with a much larger difference between CO2 allocated under PAP accounting methods (48.9m tonnes of CO2 in 2004) and under CAP (71.5m tonnes of CO2). There is a 46% increase as we move from measuring CO2 generated within Scotland, to measuring the full amount of CO2 embodied in Scottish consumption in the form of Scotland’s ‘carbon’ (CO2 equivalent) footprint. However, a key underlying determinant of Scotland’s CO2 trade deficit, particularly with the rest of the UK, is the fact that Scotland is a net exporter of electricity. In this respect, the results in Table 2 reflect the (increasing) prevalence of renewable generation technologies in Scotland, which means that the export side of Scotland’s CO2 trade balance with the rest of the UK has a lower CO2 intensity and content than it would if these technologies had not been implemented. While of course there should be concern over the CO2 content of Scottish imports, the key implication that emerges from our results is that Scotland, by fostering renewable technologies in electricity generation, is helping to lower the carbon footprints of its trade partners, particularly the rest of the UK. However, this is not reflected in the CAP accounting measure. Moreover, such changes make Scotland’s balance of trade in emissions worse.

This is illustrated by the fact that if we were to assume that UK average polluting technologies apply throughout the nation in the CO2 accounting exercise, not only is Scottish domestic CO2 generation

Page 73 (estimated under PAP) higher (at 66.7 million tonnes), we find that it would actually run a CO2 trade surplus with the rest of the UK, and its CAP‐based carbon footprint would only be 17% higher than its domestic CO2 generation, compared with the 26% difference at the UK level. Thus, it would seem that Scotland is ‘punished’ in CO2 trade balance terms by having adopted cleaner technologies in producing what are usually quite CO2 intensive exports (see McGregor et al, 2008).

3.3 The central question to ask is whether either of the PAP or CAP measures are appropriate on their own for CO2 accounting. Both PAP and CAP methods are clearly dependent on consumption and technology decisions taken both within and outwith the reporting region or nation. Moreover, in the case of regional economies, it raises questions as to the role of indicators and targets across different regions that may play different (complementary) roles in delivering on economic and environmental sustainability. For example, in work for Wales (reported in Turner et al, 2011b), we find that CO2 emissions are lower under CAP than under PAP. This largely due to the fact that a significant share of Welsh PAP emissions are generated in producing steel for export to the rest of the UK to serve as inputs to the wider, but on average less CO2‐intensive, manufacturing sector.

3.4 It also should be noted that calculation of CAP measures is extremely data‐intensive and subject to error. The crucial problem is that information is required on production and polluting technologies in all of the countries from which the reporting economy imports. As explained in Turner et al (2011a), our estimates of the pollution content of imports are based on data provided by colleagues at the OECD. However, as we discuss in our previous research that dataset is imperfect and incomplete, although OECD is currently working to improve it.

4 Conclusions 4.1 Three broad issues should be considered in considering the use of CAP and/or PAP measures. The first concerns the incentives that each implies. If we are to focus on CAP‐based targets at the national and/or regional level, this implies that we are completely unconcerned with any reduction in the emissions embodied in what we export, since under CAP this is the responsibility of consumers in another jurisdiction. Rather, we are solely concerned with reducing the emissions embodied in what we consume. On the other hand, focusing solely on a PAP‐based target may lead to replacing domestic production with imports of CO2‐intensive goods and services. Generally, the strategy employed to meet any target set must take account of what the target itself does and does not cover. For example, pursuing a CAP target may lead to the potentially paradoxical situation where domestic governments are not incentivised to constrain domestic pollution where this is

Page 74 generated to serve foreign demands. On the other hand, a CAP‐based measure gives the reporting authorities an incentive to reduce the emission intensity of technologies used to produce imported goods, over which the reporting policymakers have little say (and no jurisdiction).

4.2 Moreover, it is also necessary to consider issues of cost and accuracy in deciding on which pollution measures to adopt. Measurement under PAP is costly but in the UK it is already in place at the national, though not at the regional, level (certainly not based on consistent official statistics). However, as noted above, appropriate databases to measure emissions under CAP for any country or region are not yet in place. Most studies rely on the subscription‐based GTAP database produced at Purdue University in Indiana. The producers of this data‐set emphasise that it is not intended for formal pollution accounting, relying as it does on subscriber contributions of input‐output data for different countries. Formal and internationally comparable CAP measurement would require internationally agreed database construction (including coverage of international trade flows in input‐output format) and accounting methods.

4.3 It is important to note that we are not suggesting that there is no merit in consumption‐based targets. Rather, given the interest in the policy community in CAP based measures, we are taking this opportunity to pose questions such as: why CAP rather than PAP targets are being promoted; what impacts are policymakers really concerned about, and what are the tradeoffs involved in the variety of measures that are available.

References McGregor, P., Swales, J.K. and Turner, K. (2008) The CO2‘trade balance’ between Scotland and the rest of the UK: Performing a multi‐region environmental input–output analysis with limited data, Ecological Economics, Vol. 66, Issue 4,pp. 662‐673. Turner, K., Yamano, N., Druckman, A., Ha, S.J., De Fence, J., McIntyre, S. and Munday M. (2011a) An input‐output carbon accounting tool with carbon footprints estimates for the UK and Scotland, , Fraser Economic Commentary, special issue (January 2011) titled ‘Energy and Pollution’, pp 6‐20. Fraser of Allander Insitute, University of Strathclyde. 2011. Turner, K., Munday, M., McIntyre, S. and Jensen, C.D. (2011b) Incorporating jurisdiction issues into regional carbon accounts under production and consumption accounting principles, Environment and Planning A, 24, pp. 722‐741. 2011.

October 2011

Page 75

Memorandum submitted WWF-UK (CON 17)

Summary of WWF-UK position on consumption-based emissions reporting

1. WWF-UK welcomes this inquiry into consumption-based emissions reporting, an issue that we have been promoting awareness of for many years. We don’t believe it is credible for the UK to claim progress towards a sustainable, green economy unless we address the impact of both UK production and UK consumption. The UK’s production emissions are on a downward trajectory, although still at a much slower pace than necessary to meet carbon budgets or to play our fair share in averting dangerous climate change. However, the carbon footprint of our lifestyles increased by almost 20% between 1990 and 2008, mainly due to increased consumption of goods imported from overseas.1

2. For WWF-UK, this is not an either/or issue, as implied by the framing of the questions of this inquiry. The conventional production-based approach to emissions accounting and regulation is a well-established and powerful tool to guide the transition to a low, and ultimately zero-carbon, economy in the UK – notably in ensuring that we make a well-managed transition away from fossil fuel dependency. The consumption perspective should be taken into account alongside production emissions in a comprehensive strategy to minimise the UK’s overall contribution to climate change.

3. WWF-UK recommends that the well-established international framework for regulating and accounting for greenhouse gas emissions should continue to be focused on production rather than consumption data. However, consumption emissions could be one useful metric to feed into discussions on equity, along with existing principles such as historical responsibility and development status.

4. Recommendations

4.1 The Government should commit to reporting on consumption emissions data annually in the National Greenhouse Gas Inventory, alongside production emissions, as is the case in Scotland and Wales.

4.2 The Government should commit to reducing emissions from UK consumption, and take into account the impact of policies on consumption emissions in policy appraisal.

4.3 The Government should mandate the Committee on Climate Change (CCC) to provide analysis of consumption emissions and take impact on consumption emissions into account when making policy recommendations.

4.4 The Government should step up support for efforts to reduce emissions in developing countries, including producer countries which provide goods for UK consumption. This includes provision of additional, new finance to support efforts to reduce deforestation and to promote clean technologies. The Government should redouble its efforts to secure innovative, secure sources of finance such as levies on international transportation and a well-designed financial transaction tax. Action to promote technology transfer and leverage private finance to support low-carbon development must also be a priority.

Page 76 4.5 The Government should confirm the inclusion of international aviation and shipping emissions in UK carbon budgets, and tighten budgets accordingly, when this issue is reviewed in 2012; and promote a global framework for reducing emissions from international aviation and shipping.

Responses to the inquiry questions

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

5. There are three main ways of reporting greenhouse gas emissions:

• Territorial emissions: emissions from UK production reported as per the Kyoto framework, which excludes the UK’s contribution to international aviation and shipping emissions. • Production emissions: emissions from UK production including international aviation and shipping emissions. • Consumption emissions: emissions from goods and services consumed in the UK, including those embedded in imports, plus aviation and shipping emissions, but excluding emissions from goods exported from the UK.

6. According to the latest figures published by the Department for Environment, Food and Rural Affairs (Defra), consumption greenhouse gas emissions increased by almost 20% between 1990 and 2008, while production emissions decreased by 14% over the same period.2 According to the Department of Energy and Climate Change figures, territorial emissions decreased by 20% between 1990 and 2008.

7. The figures for 2008 greenhouse gas emissions were as follows:

• Territorial emissions: 623.8 million tonnes of CO2 equivalent (mtCO2e) • Production emissions: 700 mtCO2e • Consumption emissions: 1076 mtCO2e

8. These figures demonstrate that the UK’s contribution to climate change extends much further than the territorial emissions included in the Kyoto framework. The stark difference in trends since 1990, with significant increases in consumption emissions, demonstrates that UK lifestyles are becoming increasingly carbon-intensive and unsustainable.

9. Aviation and shipping emissions account for about 17% of the difference between territorial and consumption emissions. The main factor in the difference is increasing reliance on imported goods, mainly from non-OECD countries.3

10. During this period, structural dynamics in the world economy have resulted in a shift towards service sectors and away from manufacturing in the UK economy. According to a 2009 report commissioned by Defra:

‘The consumption perspective suggests that [territorial emissions reductions] should be mainly regarded as changes in the international division of labour (i.e. shifts in the allocation of production processes across the globe and changes in regional/national specialisation in the production of goods and services), where the UK increasingly specialises on the provision of services.’4

Hence broad dynamics of globalisation were the main driver, rather than environmental, climate or social policies implemented in the UK.

Page 77 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?

11. Methodologies for measuring consumption emissions are improving to the extent that they can now be meaningfully monitored. The UK Government (through Defra) is confident enough in its methodology to publish consumption emissions data, though they are not included in the UK’s National Greenhouse Gas Inventory.5 Reports and data have been published relating to Scotland’s consumption emissions6, and those of local authorities in Scotland7 and the UK as a whole8. Furthermore, the governments in Scotland and Wales have both committed to publishing consumption emissions data alongside production emissions.9

12. The best methodology that WWF-UK is aware of is Multi-regional Input-Output (MRIO) modelling. WWF-UK is not an expert on methodology, but we have worked with the following and can recommend their authority on this subject:

• John Barrett, University of Leeds • Edgar Hertwhich, Norwegian University of Science and Technology (NTNU) • Glen Peters, Centre for International Climate and Environmental Research (Cicero)

13. Software tools for policy makers are available, based on MRIO, such as the Resource and Energy Analysis Programme (REAP). WWF-UK has led a consortium of European partners to develop a new version of REAP for EU national and regional policy makers (EUREAPA) which will be launched in November 2011, see http://www.oneplaneteconomynetwork.org/index.html.

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

14. As mentioned in our summary, we do not recommend that a consumption-based approach to emissions accounting is adopted rather than a production-based approach. Consumption emissions should be accounted for alongside production emissions.

15. It is critical that the UK retains its current strong focus on production emissions, as enshrined in the Climate Change Act and carbon budgets. It is in the UK’s national interest to decarbonise as swiftly as possible. This will improve our energy security, reduce reliance on imported and costly fossil fuels, and create opportunities for new green jobs and industries. The production-based approach also has considerable merits in that the levers to address these emissions are clearly within the direct control and mandate of UK policymakers.

16. Strong action to reduce the UK’s emissions, including the Government’s acceptance of the fourth carbon budget, is important in demonstrating commitment and promoting an international effort to minimise the impacts of climate change. Indeed, it is encouraging to see that many countries are now looking to the UK Climate Change Act as a model to guide their own transition to a low-carbon economy, with Denmark and Australia recently confirming that they intend to introduce similar national legislation.

17. We also believe it is critical to address emissions arising from UK consumption for the following reasons:

• The UK has a moral responsibility to minimise the impact of its footprint on people and nature around the world. • The UK has a strategic interest in the transition to a low footprint, low carbon society to ensure food, energy and economic security. • Action in the UK inspires action in other countries towards a global effort. Conversely, inaction in the UK undermines our credibility when urging other countries to act.

Page 78 18. Parallel reporting on the UK’s consumption-based emissions can help to identify any risk of perverse consequences arising from a sole focus on production-based emissions. Any accounting methodology can lead to perverse consequences if applied unthinkingly. For example, the convention that bioenergy is zero-carbon at the point of combustion ignores the sometimes large emissions arising during production of the fuel, with the risk that climate change policies could incentivise net increases in global emissions. Recognising these risks, and taking compensating policy action, is vital.

19. Consumption based accounting can also help to identify areas for specific additional policy interventions to reduce the UK’s consumption footprint. It is a particularly useful tool for companies, notably in the food sector, to examine emissions along the full length of their supply chain.

20. We note that the Government has one early opportunity to address part of the disparity between consumption and territorial emissions. Emissions from international aviation and shipping are growing rapidly, but are not accounted for under the existing Kyoto framework. Under the Climate Change Act, the Government must include the UK’s share of international aviation and shipping emissions within the carbon budgets by the end of 2012, or give a clear justification for failing to do so. WWF-UK believes that the Government should clearly include the UK’s share of international transport emissions within the carbon budgets, and ensure that targets for the rest of the economy are tightened accordingly. The UK must also redouble its efforts to secure an international agreement to address emissions from aviation and shipping, and also to raise finance from these sectors to support climate action in developing countries.10

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

21. WWF-UK is not aware of evidence that UK climate change policy has had a significant effect on industry relocating from the UK. It is clear that previous claims that business is being driven overseas by carbon regulation, including the EU Emissions Trading Scheme, have been shown to be greatly exaggerated or even groundless. In terms of future impact, the Carbon Trust estimates that ‘implementing the current EU ETS Phase III targets to 2020 without any free allocation of allowances or protection would drive less than 2% of emissions abroad.’11 In practice, there is significant free allocation to manufacturing industry, and the Carbon Trust concludes that the risks of carbon leakage are largely confined to certain sub-sectors.

22. However, some industry bodies are now expressing strong concern about the impact of future policies. Several industry bodies and companies in sectors such as steel manufacturing have lobbied strongly against policies that could increase electricity prices, notably the carbon floor price, and also the fourth carbon budget. WWF-UK notes that many of the same bodies are also lobbying strongly against any increase in the EU emissions target – in striking contrast to a growing body of more progressive business voices.12

23. Heavy industry faces two main issues: the carbon price under the ETS; and any increase in electricity prices as a result of climate change policies. On the former, it is worth noting that manufacturing sectors have received extremely generous allocations under the EU ETS, and may continue to do so going forward.13 Analysis by Sandbag shows that Tata Steel’s UK operations have so far received more than 71 million surplus allowances, representing a windfall of some Euros 335 million. On the issue of carbon and electricity prices, it is also worth noting that the carbon floor price does nothing new. The original EU climate package of 2008 foresaw a 2020 carbon price of Euros 30 per tonne. In 2010, this expectation dropped to 16 EUR/tonne by 2020. The carbon floor price essentially recalibrates climate action to be consistent with the level of ambition planned in 2008.

24. Potential impacts on manufacturing industry must be taken seriously, but numerous independent analyses suggest that the risks of ‘carbon leakage’ have been significantly over- stated and that only a few sectors face genuine issues. It is also very important to ensure that any continuation of longstanding trends in the restructuring of manufacturing industry is not

Page 79 unfairly attributed to climate policy. WWF-UK looks forward to the Government’s forthcoming policy to address these issues, but thinks it essential that the overall ambition of climate change policies should not be diluted. We are not convinced that a wholesale move to consumption- based reporting or targets would be an appropriate response to address the specific concerns. If genuine risks are found to exist, then more tailored policies to correct any distortions in particular sectors would be more effective.

25. WWF-UK also believes that it is important to recognise that many countries – including in the developing world – have now pledged emission reduction goals for 2020. These include countries such as Brazil, China and Indonesia that are significant exporters of goods that are consumed in the UK. The collective ambition of pledges put forward by all parties falls far short of what is needed to put the world on a pathway to stay below 2°C warming14 – quite simply, all major economies need to raise their ambition. This clearly includes the EU, which has so far failed to increase its emissions pledge for 2020 from a 20% reduction below 1990 levels which is now little more than business as usual. It also includes the UK, which has rejected the recommendations from the Committee on Climate Change to increase the ambition of the first three carbon budgets and remains pegged to low levels of EU ambition. While the fourth carbon budget is better aligned with what is necessary, it is subject to a review in 2014, and again has been linked to EU progress.

26. However, WWF-UK rejects the simplistic view which implies that manufacturing industry may leave the UK or EU because developing countries are not pulling their weight. A recent analysis by the Stockholm Environment Institute found that the developing countries have pledged to reduce emissions by considerably more than developed economies.15 Similarly, analysis of country pledges by Climate Action Tracker shows that most developed country pledges – including the EU’s 20% target for 2020 – are ‘inadequate’ when set against the 2°C objective.16 In general, most developing country pledges are seen as more ambitious, although Climate Action Tracker recently downgraded its assessment of China’s pledge. Of course, any comparison of developed and developing country action must also take full account of differences in development status, capacity to act, per capita emissions and historical responsibility, as enshrined in the principle of common but differentiated responsibilities and capabilities under the UN Framework Convention on Climate Change (UNFCCC).

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

27. WWF-UK would in principle support the adoption of a consumption emissions target in the UK, as well as the production based target. At the very least the Government should report on consumption emissions and commit to putting them on a downward trajectory. This should not be at the expense of the current strong focus to reduce production emissions, where WWF-UK sees a strong case to set more ambitious targets and to greatly improve the policy framework to ensure they are met. As a minimum, the Government should urgently adopt the ‘intended’ first, second and third carbon budgets, as recommended by the Committee on Climate Change (CCC). Without this there is a strong risk that meeting the fourth carbon budget will require an implausible step change. WWF-UK also strongly endorses the CCC’s call for a near decarbonisation of the power sector by 2030, and its warnings that a ‘step change’ in policy ambition and credibility is needed to deliver on our targets under the Climate Change Act.

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?

28. The current Kyoto framework is based on production emissions. It is extremely well- established, and based on good quality data sets and monitoring protocols. WWF-UK strongly recommends that the UK and all parties to the UNFCCC should continue to work clearly within this framework.

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29. The UK should not promote a shift to an international policy framework based on consumption emissions. This proposal would have very little support internationally and would threaten the emergence of a new binding global deal. It would raise difficult issues of sovereignty over control of emissions within national borders. It could also soak up much negotiating time and effort, so distracting governments and negotiators from the urgent task of agreeing an early peak in global emissions and a legally binding framework to deliver this. The priority must be to secure more ambitious action, and to close loopholes, within the existing framework.

30. However, it is important that levels of effort agreed by nations are informed by clear equity- based principles to ensure that any global agreement is fair. Consideration of the dynamics of global trade, and the use of consumption emissions data, could usefully contribute to discussions on equity in the global framework. This criterion would be taken into account alongside established principles such as historical responsibility, per capita emissions and development status.

October 2011

References

1 Defra 2011, see: http://www.defra.gov.uk/statistics/environment/green-economy/scptb01-ems/

2 See: http://www.defra.gov.uk/statistics/environment/green-economy/scptb01-ems/

3 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 Defra by Stockholm Environment Institute

4 Ibid, p34.

5 Defra 2010, Measuring Progress, Sustainable Development Indicators.

6 Stockholm Environment Institute, 2009, Production of a Time Series of Scotland's Ecological and Greenhouse Gas Footprints

7 WWF-UK, SEI and Sustainable Scotland Network 2009, Carbon footprinting for Scottish local authorities: http://www.sustainable-scotland.net/documents/WWF- UKScotlandFullReportARTForWeb.pdf

8 WWF-UK and SEI 2006, Counting Consumption: http://www.WWF- UK.org.uk/filelibrary/pdf/countingconsumption.pdf

9 See Scottish Climate Change Act 2009 and Welsh Climate Change Strategy 2010

10 See, for example, Out of the Bunker: Time for a Fair Deal on Shipping Emissions, a recent WWF-UK/Oxfam briefing paper on http://assets.WWF- UK.org.uk/downloads/bn_out_of_the_bunker.pdf

11 Carbon Trust 2010, Tackling Carbon Leakage.

12 http://www.theclimategroup.org/_assets/files/JointBusinessDeclaration-June-3.pdf

13 http://www.sandbag.org.uk/site_media/pdfs/press_releases/PR_EUETS_dataUKrelease_1April 2011.pdf

6 Page 81

14 See The Emissions Gap Report: Are the Copenhagen Accord Pledges Sufficient to Limit Global Warming to 2C or 1.5C?, UNEP November 2010, http://www.unep.org/publications/ebooks/emissionsgapreport/

15 Comparison of Annex 1 and non-Annex 1 pledges under the Cancun Agreements, Sivan Kartha and Peter Erickson, Stockholm Environment Institute, Working Paper WP-US-1107, on http://sei-international.org/mediamanager/documents/Publications/Climate/sei-workingpaperus- 1107.pdf

16 See data on http://www.climateactiontracker.org/country.php

7 Page 82 Memorandum submitted by EEF/UK Steel (CON 18)

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:

Page 83 Table 1 1997 2007 2007 over 2010 2010 over Million tonnes 1997 M 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

Page 84 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

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

Page 85 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 (i.e. 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.

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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 (e.g. 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

Page 87

Memorandum submitted by the Carbon Trust (CON 19)

Thank you for this opportunity to submit evidence to the Energy and Climate Change Committee’s inquiry into consumption-based emissions reporting. The Carbon Trust has an extensive history of domestic and international activities that are directly relevant to this issue, including: • PAS 2050: the Carbon Trust authored the world’s first product carbon footprinting standard, with accompanying accreditation programme • Footprinting: the Carbon Trust has worked with a range of companies to provide product-level carbon footprinting and labelling services • International Carbon Flows: our recently published study on global and sectoral flows of emissions embodied in trade • Low Carbon Living: our programme of work on options for reducing the emissions intensity of every-day activities

Enclosed with this letter is our recent analysis of international carbon flows embodied in international trade, and the importance of these flows at a national and sectoral level. This International Carbon Flows (ICF) analysis is referenced in our response to the Committee’s questions below.

1. How do assessments of the UK's greenhouse gas emissions differ when measured on a consumption rather than a production basis? The UK’s GHG emissions are significantly larger when viewed from a consumption, rather than production basis. Analysis by the Carbon Trust, drawing on models developed by the Stockholm Environment Institute, shows that in 2004 the UK’s consumption CO2 emissions were 34% greater than (the usually reported) production emissions (see Figure 1). The majority of the net emissions imports into the UK were in the form of final goods for consumption. Our analysis shows that the importance of imported emissions in the UK has grown markedly between 1992 & 2004, and our modelling suggests that within 15 years more than half of the emissions arising from consumption in the UK will be occurring overseas. (Further details, and a full analysis of UK emissions from a consumption perspective, are available in the ICF chapter on Global emissions, pages 11 to 18.)

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? Not only is modelling consumption-based emissions possible, but it is being successfully carried out by a number of research institutes and government organisations. There are difficulties in determining the uncertainty associated with specific model results, and research has been conducted on this very point: however, in terms of informing policy development, any real or perceived uncertainty in the modelling approaches should not be used as a basis for inaction.

Page 88 Figure 1: The impact of a consumption-based view on emissions by country

At a national level, approaches such as multi-regional input-output models (MRIO - the type of modelling behind our ICF publication) are suitable for country and sector-level estimates of consumption-based emissions (e.g. Figure 1 ). At a product level, life cycle assessment approaches such as those behind the PAS 2050 standard, and the recently published WRI/WBCSD Product GHG Protocol, provide a bottom up assessment of life cycle emissions. Both levels of analysis are important, and relevant at different scales: MRIO approaches inform overall targets and goals at a country level, while specific policies and consumer information programmes could leverage the product-level standards that are available.

3. What are the benefits and disadvantages associated with taking a consumption-based rather than production-based approach to greenhouse gas emissions accounting? It is not necessary to choose one approach to emissions assessment over another, as emissions assessments from both production and consumption perspectives are valuable. Consumption-based approaches offer additional insights and approaches to the current production-based view, and should not be viewed as a substitute. The benefits of including a consumption-based view of GHG emissions are multi-fold: correct accounting for national responsibility for emissions; identification of the opportunities for new policies to support environmental action; and identification of new levers for business and consumers to drive lower carbon consumption. Specific examples of how a consumption-based view of emissions would be relevant include: • EU Emissions Trading System: the EU ETS operates on a production emissions basis, yet for some sectors the consumption view of emissions is dominated by embodied emissions imported in trade. For example, two-thirds of the emissions arising from

Page 89 aluminium consumption in Europe arise outside of the EU ETS (see the ICF chapter on Aluminium, page 11) • Performance standards: current EU approaches to vehicle emissions focus on use-phase efficiency, while a consumption perspective reveals that within a decade most emissions in the life cycle of vehicles could arise from manufacturing and disposal (See ICF Automotive: page 14) • Need for investment: with demand forecast to increase at the same time that emissions need to fall in sectors such as steel, there is a need for far greater innovation investment to unlock a step-change in emissions reductions through the commercialisation of new technologies (see the ICF chapter on Steel, page 19)

4. Is there any evidence of industry relocating from the UK to other countries as a result of UK climate change policy? The Carbon Trust has previously published research on the impact of leakage arising from emissions pricing under the EU ETS. This research suggested that the scale of leakage from carbon pricing is expected to be small, and the risks tend to be focussed in specific sectors. This earlier finding is supported by more recent work by the Carbon Trust, which showed that: a. The projected growth in importance of “imported” emissions arises from greater consumption in Europe rather than from carbon leakage (see Figure 2), and b. The relative cost advantages enjoyed by other regions (compared to the EU) for the development of new production facilities in some sectors such as aluminium and steel exist irrespective of EU ETS emissions pricing (e.g. see ICF Aluminium: page 8).

Figure 2: Within the EU ETS, growth in embodied carbon imports are five times larger than estimates of unmitigated ‘carbon leakage’

5. Would it be (a) desirable and (b) practicable for the UK to adopt emissions reduction targets on a consumption rather than production basis? We believe that this question should be viewed the other way around: how is it possible for the UK to genuinely demonstrate that its policies are achieving lower emissions unless it considers all emissions that arise to support our standard of living in the UK? This does not mean the immediate replacement of current policies; however, an informed debate about the costs and

Page 90

impacts of emissions mitigation policies cannot be had if a significant part of those emissions are not being accounted for. The second stage in this process could be setting emissions reduction targets on a consumption basis. This would involve measuring emissions from a consumption basis, identifying opportunities to reduce the emissions intensity of consumption, the policies and actions that might enable these, and potentially setting targets on a consumption basis. The practicality of supply chain emissions assessment has already been demonstrated at a product level (product carbon footprinting & labelling), and work is continuing to improve these processes and make them lower cost.

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? It is important to be clear on what “adopting” means in this context. In relation to question 5, the international implications of the UK adopting a consumption-based measurement and reporting approach are low, as it would essentially act as a parallel reporting mechanism alongside the conventional production-based accounts. However, were the UK to adopt consumption-based targets, and policies that limited consumption emissions, then there would be potential for wide-ranging international implications. Further work would be beneficial in understanding the impacts arising from different policy responses to consumption-based accounting.

7. Are there any other issues relating to consumption-based emissions reporting that you think the Committee should be aware of? In our experience, most discussions around consumption-based approaches to emissions policies, and in particular consumption-based emissions pricing, quickly gravitate towards the advantages and disadvantages of border adjustment measures. While this is a potential policy route, it is important for the Committee to keep in mind that there are a wide variety of approaches that could be adopted to support consumption-based action on emissions mitigation. For example, generating value in the consumers’ mind over the desirability of lower emissions products could embed consumption and supply chain based thinking in a wide range of consumer products, from foods to clothing and electronics.

October 2011

Page 91

Memorandum submitted by UKERC (CON 20)

Authors John Barrett (University of Leeds), Corinne Le Quéré, (Tyndall Centre for Climate Change Research, University of East Anglia), Manfred Lenzen (University of Sydney), Glen Peters (Center for International Climate and Environmental Research), Katy Roelich (University of Leeds), Tommy Wiedmann (Commonwealth Scientific and Industrial Research Organisation)

The UK Energy Research Centre carries out world-class research into sustainable future energy systems.

It is the hub of UK energy research and the gateway between the UK and the international energy research communities. Our interdisciplinary, whole systems research informs UK policy development and research strategy.

Executive Summary

• Greenhouse gas (GHG) emissions can be allocated to a country in different ways, territorial-, production- and consumption-based emission reporting. There is a marked difference in end results depending on the chosen system. For example, the UK territorial-based emissions have shown a 19% reduction between 1990- 2008. Conversley, consumption-based emissions show a 20% increase during the same period, which is driven by GHG embodied in imported products. • It is possible to develop a robust methodology for measuring GHG emissions on a consumption-based approach. In the past 10-years there have been multiple independent studies published on this subject that display consistent results. The methodology of choice is Environmentally Extended Multi-Region Input-Output (EE-MIRO) Analaysis. Whilst there are uncertainties relating to the large and often incoherent datasets, it is believed that standard error estimates can be used to provide confidence in the results. There is significant expertise in EE-MIRO in the UK. • Consumption-based emission inventories are not a silver-bullet for climate policy. Different emission inventories contain complementary information, and thus, consumption-, production-, and territorial-based emission inventories should be considered together.

Page 92 • That said, consumption-based emission modelling does have speciific advantages, in that: 1. It may reveal policy approaches specific to different products. 2. It enables the possibility of standard carbon accounting for organisations globally. • The main disadvantage to consumption-based emission modelling is that it requires additional accounting and analysis. • It is desirable to adopt emission reduction targets based on consumption, in addition to production, for three reasons: 1. It would incorporate options to address ‘weak carbon leakage’ (carbon embodied in imports). 2. It encourages reduction of emissions at least cost, even if the most cost effective option addresses non-territorial emissions. 3. Consumption-based emissions are increasing and as such are undermining UK domestic climate policy. • UKERC proposes three-steps the UK Government could pursue should they wish to move towards consumption-based emission reporting: 1. The UK Government, in conjunction with UNFCCC and Eurostat, could establish standards for the harmonisation of consumption-based emission reporting methods to ensure robustness and consistency between country estimates. 2. The UK Government should commission a report to assess all the UK demand-side strategies contributing to emission reduction within and without of the UK. 3. The UK Government could assess the cost-effectiveness of demand-side strategies to understand whether they are revenue generating or a cost.

Page 93 Consultation response

Question 1 – How do assessments of the UK’s Greenhouse Gas Emissions differ when measured on a consumption rather than production basis?

There have been two comprehensive studies of the UK’s greenhouse gas (GHG) emissions from a consumption-based perspective. The first set of studies were undertaken by Dr. Thomas Wiedmann, Dr. Jan Minx and Professor John Barrett (formerly at the Stockholm Environment Institute) in collaboration with University of Sydney (Lenzen et al., 2010; Wiedmann et al., 2008; Wiedmann et al., 2010). These studies showed that growth in consumption-based GHG emissions by 20% between 1990 and 2008 (see figure 1 and more detailed description below). This research is now being continued at the University of Leeds by Professor John Barrett. Leeds has a contract with Defra to calculate the consumption-based GHG emissions of the UK for the following five years, providing date for 2009 to 2014.

The second study of significance was undertaken by Dr. Glen Peters from the Center for International Climate and Environmental Research – Oslo (CICERO) and colleagues (Dr. Jan Minx at the Technical University of Berlin, Dr. Christopher Weber at the Carnegie Mellon University, and Professor Ottmar Edenhofer at the Potsdam Institute for Climate Impact Research) where they estimated the consumption-based carbon dioxide emissions for 113 world regions. A key finding was although many developed countries stabilised their territorial emissions, there was often an associated increase in emissions in developing countries through producing the imported goods and services (Peters et al, 2010). This was also the case for the UK, consistent with the findings of the first set of studies.

GHG emissions can be allocated to countries in different ways, and different allocations may give preference to different mitigation strategies. For this consultation, we consider three different methods of allocating emissions: 1) territorial-based, 2) production- based, and 3) consumption-based.

1) The United Nations Framework Convention on Climate Change (UNFCCC) requires countries to submit annual National Emission Inventories. These inventories are used to assess the progress made by individual countries in reducing GHG emissions. The UNFCCC follows the Intergovernmental Panel on Climate Change’s guidelines in term of the allocation of GHG emissions which is, “emissions and removals taking place within national (including administered) territories and offshore areas over which the country has jurisdiction” (IPCC, 1996, pp.5). According to this definition, however, GHG emissions emitted in international territory, international aviation and shipping, are only reported as a

Page 94 memo and not allocated to individual countries. We call these “territorial-based emission inventories”.

2) In official reporting to Eurostat, GHG emissions are allocated in a consistent manner to the system boundary for economic activities such as the Gross Domestic Product (GDP) used in the System of National Accounts (SNA). In the SNA, international aviation and shipping are typically allocated to countries based on the operator of the vessel. We call these “production-based emission inventories”. Particularly in Europe (Eurostat), these inventories are often known as “National Accounting Matrices including Environmental Accounts (NAMEAs)”.

3) Consumption-based emissions allocate emissions to the consumers in each country, usually based on final consumption as in the SNA but also as trade- adjusted emissions (Peters, 2008). Conceptually, consumption-based inventories can be thought of as consumption equals production minus exports plus imports. We call these “consumption-based emission inventories”. Consumption-based emissions are currently not reported officially by any country, but they are increasingly estimated by researchers (see reviews by Wiedmann et al, 2007; Wiedmann, 2009).

1,300

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(mt) Kyoto greenhouse gas basket 900 Full Territorial CO2e 800 Consumer

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500 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Figure 1: Comparison of UK consumption-based GHG Emissions with territorial GHG Emissions from 1990 to 2008. (Source: Wiedmann and Barrett, 2011;)

Figure 1 provides the latest time-series results from the University of Leeds with the Centre for Sustainability Accounting Ltd from these three perspectives. The UK GHG emissions reported to the UNFCCC (territorial perspective) have shown a 19% reduction in territorial GHG emissions between 1990 and 2008, representing an annual decline of around 1% a year. GHG emissions are now 145 million tonnes lower in 2008 than they were in 1990 and the UK Government has achieved its target established under the Kyoto Protocol.

Page 95 From a production perspective, there has been a 14% reduction (red line in figure 1), meaning that greater reduction is achieved in emissions that are accounted for under the Kyoto Protocol than ones that are not. In fact, GHG emissions that were not accounted for under the Kyoto Protocol have doubled between 1990 and 2008 – for example, between 1990 and 2008 international shipping and aviation accounted emissions doubled from 36 million tonnes to 72 million tonnes.

From the consumption perspective, there has been an increase in GHG emissions in the UK. In 2008, consumer GHG emissions were 20% higher than 1990. The UK’s GHG emissions from a consumption perspective are rising at a rate of over 1% a year. This is in stark contrast with the 1% decrease each year in territorial GHG emissions. The gap between consumption and territorial has continued to grow year on year. Similar results were found in the study undertaken by Peters et al, published in 2011.

The results demonstrate the scale of variation between territorial and UK consumption- based emission, in Figure 2, the direct emissions from UK households are displayed since they are, by definition, occurring entirely in the UK. In 1992, 64% of the GHG emissions associated with goods and services were emitted inside the UK. In 2001, a cross-over occurred where GHG emissions embodied in imports, which are ultimately caused in order to satisfy UK consumption, were greater than emissions due to domestic production (Barrett and Minx, 2011).

500,000 GHGs Embedded in UK Consumption satisfied 450,000 by domestic production

400,000 GHGs Embedded in UK Consumption from 350,000 Imports

300,000 Household Direct GHG CO2e Emisisons kt 250,000

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100,000 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Figure 3: UK Consumption-based GHG Emissions by Origin (1990 to 2008) Source: Barrett and Minx (2011)

Question 2 – Is it possible to develop a robust methodology for measuring emissions on a consumption- rather than production-based approach to greenhouse gas emission accounting?

In short, given the multitude of independent studies with consistent results, the answer to this is “yes”. The last ten years in particular has seen an substantial increase in carbon

Page 96 footprint and related studies that aim at allocating GHG emissions on a consumption basis. These studies have developed methodologies with a particular emphasis on robustness and reducing uncertainty.

A recent European project (Wiedmann et al., 2009) identified Environmentally Extended Multi-Region Input-Output (EE-MRIO) Analysis as a favourable approach for the assessment of environmental impacts of trade. The two studies described above have both used this methodology, although different data sources for some elements of the models were used. EE-MRIO is emerging as a comprehensive, versatile and compatible approach for consumption-based accounting of greenhouse gas emissions and has already become the norm (Peters, 2008; Peters and Hertwich, 2008b; Wiedmann, 2009b, Davis and Caleira, 2010). Strengths and weaknesses of the EE-MRIO approach were assessed in the European EIPOT project (Wiedmann et al., 2009).

A detailed uncertainty analysis of the UK national carbon footprint calculations using EE- MRIO modelling was undertaken as part of the first study undertaken for Defra. Figure 4 below provides the results of this uncertainty analysis. While all emission inventories have some uncertainty (Figure 4), consumption-based estimates will have a larger uncertainty due to the incorporation of more input data. Figure 4 demonstrates that there is an additional uncertainty of the headline results in the region of 3% between consumption- and production-based accounting. Additional uncertainity can be seen at the sector level.

ONS Environmental Accounts ("producer emissions")

850 UK Carbon Footprint ("consumer emissions") Emissions reported to UNFCCC (UK territorial emissions)

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Figure 4: Uncertainty Associated with UK consumption-based CO2 Emissions (as calculated using EE-MRIO analysis). Source: Lenzen et al., 2010

The key reason for increased uncertainity is that MRIO datasets combine data from a large, and often incoherent data sets. The uncertainties relate to issues, including calibration, balancing and harmonisation, use of different time periods, different currencies, different country classifications, levels of disaggregation, inflation, and raw data errors (Lenzen, 2001; Lenzen et al., 2004; Peters, 2007; Weber, 2008; Lenzen et

Page 97 al., 2010). Many of these manipulations reflect inconsistent reporting practices in different countries and regions, and a process of harmonisation can greatly reduce the necessary manipulations, and hence, uncertainties (Peters and Solli, 2010).

However, it is entirely possible to account for such errors, by applying error propagation methods, and determine their influence on the analytical results of carbon footprint studies, by employing Monte-Carlo simulation techniques. Even though single data items may be associated with a high degree of uncertainty, aggregate measures such as emissions embodied in imports into the UK, or emissions from domestic production, are usually known with much more certainty. This circumstance can be quantitatively expressed by using standard error estimates, and visualised with error bars. Exactly these approaches were used by Lenzen et al., 2010 to demonstrate that the increase of the UK’s carbon footprint was statistically significant.

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

Consumption-based emission inventories should not be considered a silver-bullet for climate policy. Different emission inventories, such as territorial, production, and consumption-based, have different system boundaries which will place focus on different mitigation strategies. The different emissions inventories contain complementary information and thus, consumption-based emission inventories, should be considered together with other emission inventories. The choice is not either/or.

Due to issues of national sovereignty, binding agreements on emissions may focus primarily on production-based emission estimates. However, for global environmental problems, such as climate change, the location of the emissions is not important. Thus, taking a production perspective gives the impression of progress towards the global environmental objective, while a consumption perspective shows the opposite (Figure 1). The reality is that consumption activities in the UK are increasing global emissions. Evidence from Defra funded research clearly demonstrated that emissions growth from consumption outpaced emission reduction from production efficiency gains (Minx et al, 2009).

The benefits of consumption-based emission modelling go far beyond highlighting the gap between territorial emissions (Minx et al; 2009). A focus on consumption-based emissions highlights new policy options that may not be realised from a production perspective. While a production perspective on emissions may identify energy production, energy-intensive industries, and transportation as dominant sources of emissions, a consumption perspective reveal manufactured products such as electrical appliances and furniture, food, clothing and services. A consumption approach may lead

Page 98 to different policy instruments that may highlight more effective policy. This was clearly demonstrated in the major study undertaken for WRAP exploring 13 different resource efficiency strategies for the UK (Barrett and Scott, 2011).Consumption-based emissions can highlight the inconsistency in carbon prices between the UK and other parts of the world where the UK imports products from. While a globally harmonized carbon price is high unlikely in the short- to medium-term, it is necessary to have some transitional policy instruments in place that ensures emissions are not reduced in the UK at the expense of increasing emissions elsewhere. It increases the argument for the UK for the need for policies to replicate EU carbon prices to ensure the UK policy is not undermined by imports. Consumption-based emissions have demonstrated the need for comprehensive roadmaps on key products that cannot be purely tackled by UK production based measures. Figure 5 shows whether the emissions from different product groups occurred inside or outside the UK. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

UK "Rest of World" Emissions UK Production Emissions

Figure 5: % of GHG Emissions occurring in the UK associated with different group groups (Barrett, Owen and Sakai, 2011)

Domestic policies on electricity generation will clearly be effective and responsive. However, such policies would barely tackle the emissions associated with the production of electronic equipment, vehicles and textiles. Different policies effecting different country efficiency improvements and demand side strategies could affect these emissions. Many of these strategies were documented in the WRAP report on resource efficiency (Scott et al, 2009). A recent study of aluminium production and consumption in the EU suggests that the production-based EU-ETS could miss around 50% of the emissions associated with the consumption of aluminium and derived products in the EU (Sinden et al 2011).

Page 99 Another advantage relates to understanding the supply chain emissions of organisations, described as scope 3 emissions by the GHG Protocol, the emerging global standard in carbon accounting for organisations. Defra publish a set of scope 3 factors that allow organisations to convert their spend profile into a carbon footprint with the complete supply chain of the products taken into account. A description of the methodology can be found in Wiedmann, Lenzen and Barrett (2010) and the scope 3 factors can be found on the Defra site (http://www.defra.gov.uk/environment/economy/business-efficiency/reporting/)

The only real disadvantage of consumption-based emission inventory is that it requires additional accounting and analysis. Although, given that the methods and data already exist for this (Questions 1 and 2), this is a relatively low cost mitigation measure.

Importantly, we do not believe that consumption-based emission accounting should replace existing methods, but rather should be used as a complementary emission inventory. Production-based methods provide the most accurate estimate for aggregated emissions at the global level, which is important for early warning systems of carbon cycle feedbacks with climate change. However, without consumption-based approaches it is impossible to measure “real” progress at the national level. Production based accounting is insufficient as a progress indicator.

Question 4: Is there any evidence of industry relocating from the UK to other countries as a result of UK Climate Change policy?

Location decisions for companies are based on a myriad of different factors, climate policy being one of them. It is likely to be extremely challenging, if not impossible, to determine if a particular industry re-located specifically due to climate policy and not for any other reason. In addition, it may be extremely difficult, if not impossible, to separate a company’s actual decision making process from it’s lobbying activities for more lenient policy. An survey of industry undertaken by the International Institute for Sustainable Development (IISD) demonstrated that there are far more significant issues than climate policy that could cause a company to relocate. These include labour costs, proximity to suppliers and consumers and infrastructure facilities to name a few (Wooders et al, 2009).

The framing of this question, however, tends to miss many of the real underlying issues. Carbon leakage can be separated into two distinct categories: weak and strong carbon leakage (Peters and Hertwich, 2008; Peters, 2010).

• Strong carbon leakage refers to an increase in global emissions due specifically to climate policy (e.g., UK Climate Change policy).

Page 100 • Weak carbon leakage refers to an increase in global emissions due to increased consumption (that is, no specific government policy is isolated as the causing factor).

The scale of weak carbon leakage is particularly important in the UK compared to other large emitters. The difference between growth in consumption-based and territorial- based emissions was the largest for the UK compared to industrial nations in the top ten

CO2 emitters, with 23% growth difference in 2008 from 1990 (for CO2 only), compared to 8% for the US, 7% for Canada, and decreases in other countries (Figure 5).

Figure 5. Growth difference between consumption-based and territorial-based CO2 emissions from 1990 for China, India, and industrial nations in the top ten emitters. Data from Peters et al. (2011).

Strong carbon leakage (a component of question 4), is generally small at today’s carbon prices. Weak carbon leakage (essentially the difference between production and consumption emission accounting) is large (Figure 1 and Peters et al 2011 PNAS). When weak carbon leakage is small and strong carbon leakage is large, it implies that another country is increasing its production (and emissions) to meet the increased consumption in the UK. The increased exports from China to the UK are a particularly important factor underlying the large increase in the UK’s consumption-based emissions.

Finally, there is a long-term concern linked to “investment linkage”, the phenomena where future capital investment occurs in countries with lenient employment, tax and environmental policy. More research is required before a more comprehensive and complete description of the problem can be provided.

Page 101 Question 5 – Would it a) desirable and b) practical for the UK to adopt emissions reduction targets on a consumption rather than production basis? a) Desirable

The key aim of climate policy in the UK is to establish a climate mitigation strategy that limits the growth of GHG emissions thus contributing to avoiding dangerous levels of temperature increase. If the UK were to consider mitigation strategies that affected both consumption and production emissions then the opportunity to achieve this goal is improved. Additionally, territorial emission targets in isolation can unintentionally lead to weak carbon leakage through imports from non-annex 1 countries (Peters and Hertwich, 2008). In 2004, of the 143 MtCO2 of net imported emissions, 67% were from imports from countries without defined emissions caps, and therefore, not covered by global emissions reductions commitments (Carbon Trust, 2009).

Second, the UK should adopt emissions reductions targets that encourage the maximum global emissions reductions at least cost. The most cost effective emissions reductions may not necessarily be reductions in territorial emissions. While further research is required on the mitigation costs and benefits of consumption-based emissions some preliminary research suggests that there are a number of strategies that could boast national growth. The comprehensive study by WRAP demonstrated that structural change would occur but strategies such as extending the lifetime of products, lean design techniques, reducing food waste and product durability could all boost the service based economy in the UK and reduce weak carbon leakage (Barrett and Scott, 2011).

Third, consumption based emissions are increasing and territorial emissions are reducing in the UK. Figure 6 shows a projection of UK GHG emissions from a consumption-based perspective. This projection used sophisticated approaches to understand the future efficiency in production in global emissions, the changing productions structure of economies and an assessment of current UK climate policy and formed part of the research by Barrett and Scott (2011).

Page 102 1,200,000

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kt GHG from Imports

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‐ 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Figure 6: Projections of UK Consumption-based GHG Emissions Source: Barrett and Scott (2011)

By 2050, domestic emissions could represent fewer than 20% of the UK emissions. This assessment includes significant improvements in carbon intensity in countries that imports products to the UK. The unintentional consequences of global trade are the undermining of UK domestic climate policy and therefore exploring the strategies for mitigation of these emissions is essential. By 2050, UK consumption emissions could only be 27% lower than 2005.

The key issue lies around the UK’s ability to reduce these emissions. If the UK were to extend its target to encompass a greater potential of global emissions then it would need to receive the credit for doing so. This could be a major advantage to the UK if more cost effective mitigation options become available. There is a real concern that while there are many mitigation options at the moment that seat on the “revenue generating side” of a marginal abatement cost curve, this may not be the case as carbon budgets get tighter. Further research is required to establish the reality of this statement. b) Practical

The UK has already in place a system to provide consumption-based accounts annually. Therefore there is little concern about the ability to produce robust consumption-based accounts on an annual basis.

Page 103 Question 6 – What are the potential implications at the international level of the UK adopting a consumption-based rather than production based approach to greenhouse gas emissions accounting?

One of the most significant international implications of the UK adopting a consumption-based approach to emissions accounting would be the avoidance of weak carbon leakage and the recognition of the influence the UK has over imported emissions.

This could set the precedent for a more comprehensive system of accounting that included a greater proportion of emissions, without requiring full participation. It might also reduce the barriers to international agreements, and particularly encourage countries without emissions targets to accept targets, if they were sharing responsibility for traded emissions, rather than having to shoulder the full burden of mitigation of these emissions.

There are well documented examples of adoption of consumption based approaches as unilaterally declared commitments without negative competitive effects within the country or region of adoption or internationally. An example of this is the adoption of Value Added Tax as a harmonised tax in Europe. The destination-based tax (consumption based) had no effects on budget constraints faced by consumers or relative prices faced by firms (Lockwood and Whalley 2010). There was initial resistance to the proposal from the United States, on the grounds that a tax on exports presented a tariff barrier. However, this argument was challenged by academic evidence that a move from an origin to a destination basis for tax would have the effect of changing price level and consequentially offered no competitive advantage to Europe.

Question 7 – Are there any other issues relating to consumption-based emissions reporting that you think the Committee should be aware of? In conclusion, the UK’s GHG emissions related to consumption have grown substantially over the past 20 years. This is an unintentional outcome related to the structure of the UK economy and does not relate to issues of “strong” carbon leakage. We have, very briefly, outlined the next steps that we believe the UK Government should take in terms of consumption-based emissions.

• With the gap between territorial and consumption-based emissions being so significant in the UK, combined with the UK Government taking a global lead in assessing their consumption-based, the UK Government, in conjunction with UNFCCC and Eurostat could establish standards for the harmonisation of methods to ensure robustness and consistency between country estimates. At present, the UK is especially vulnerable to criticism from the international

Page 104 community because the leakage of its emissions is larger than that of all other large industrial nations. The UK has thus a problem of credibility for the negotiations of international agreements on climate change, in spite of demonstrated progress in territorial GHG emissions. Acknowledging and addressing the problem would strengthen the leadership of the UK in international negotiations. • The UK has a number of policies and strategies that affect emissions embedded in trade. The UK Government should commission a report to coherently document all the demand-side strategies that are contributing to emission reduction both inside and outside the UK. The study undertaken for WRAP is an excellent example of quantifying many of the strategies in the UK; however this purely focuses on resource efficiency and does not incorporate the work of Defra’s Sustainable Products team and UK companies reducing emissions throughout the supply chain. • An economic assessment of the cost effectiveness of the various strategies should consider using a similar approach to appraise territorial methods documented by the Committee on Climate Change. This used “Marginal Abatement Cost Curves” (MACC) to assess whether various strategies were revenue generating or a cost.

October 2011

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Page 109 Memorandum submitted by the Centre for Alternative Technology (CON 21)

This submission answers questions 1,2,3 and 7. This submissions draws attention to three key issues in the discussion of the UK’s consumption emissions:

1. The government’s lack of transparency and openness in dealing with the issue to date 2. The current state of evidence on how to measure and reduce the UK’s consumption emissions 3. The need to swiftly improve on this by publicly publishing UK emissions on a consumption basis and starting to take measures to address these.

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

When measured under a consumption rather than production basis the UK’s greenhouse gas emissions are higher. Research by the Stockholm Environment Institute commissioned by DEFRA shows that while production emissions have dropped, consumption emissions have risen.1 The increase in consumption emissions more than outstrips the emissions reductions made in the UK.

As well as understanding the size of the UK’s consumption emissions we also have a good understanding of where emissions flow from and to, with China a major source, as the UK is heavily dependent on it for carbon‐intensive manufacturing.2 The Government has also carried out research estimating the future scale of Britain’s emissions when measured on a consumption basis. These projections, produced by the Carbon Trust, show that by 2025 the UK’s production emissions could have dropped to 463 MtCO2, but consumption emissions could be at 444 MtCO2. 49% of the UK’s emissions would be imported.3

In documents obtained under the Freedom of Information Act (referenced further in this submission) various departments have indicated that measuring and reducing the UK’s consumption emissions would be impossible because: consumption emissions are too difficult to measure; they’ll be dealt with by the international climate change negotiations; the Committee on Climate Change are too busy to investigate the issue. However, evidence contained in this submission will make it clear that none of these points are valid.

1 Embedded Carbon Emissions Indicator, DEFRA (2008) http://randd.defra.gov.uk/Default.aspx?Menu=Menu&Module=More&Location=None&Completed=0&ProjectID=14606 2 Steinberger, J. K., J. T. Roberts and G. P. Peters (2011) Forthcoming 3 International Carbon Flows - Global flows (CTC795), Carbon Trust (2011) http://www.carbontrust.co.uk/publications/pages/publicationdetail.aspx?id=CTC795

Page 110 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?

Research already exists detailing how to calculate and predict emissions on a consumption basis. A small selection of recent research is detailed here:

● PBL Netherlands Environmental Assessment Agency have produced a methodology for calculating and reducing emissions on a consumption basis4. This research is sector and country specific. For example the model can show for any part of the Dutch economy where in the world the carbon emissions are being produced.

● Other methodologies use country Supply and Use Tables (SUT) and Input Output Tables (IOT) to calculate emissions on a consumption basis. Two such models are already in use. EXIOPOL is a framework using externality data and input / output tools to calculate emissions on a consumption basis.5 CREEA is a project compiling and refining environmental and economic accounts.6 TNO in the Netherlands have combined both data sets to produce consumption based emissions estimates.7 8

● The Carbon Trust already use a model for calculating consumption emissions developed by the Center for International Climate and Environmental Research (CICERO).9 The CICERO model uses two methods: Emissions embodied in bilateral trade (EEBT) and the Multi‐Region Input‐Output (MRIO) model. CICERO have successfully combined both methods to produce embodied consumption estimates in their paper Growth in emission transfers via international trade from 1990 to 2008. The methodology behind both MRIO and EEBT is explained in the appendix of this paper.10

4 Consumption-Based Accounting, A Tool for Policy. Harry Wilting. PBL Netherlands Environmental Assessment Agency. Presentation delivered 5 July, 2011. Slides PDF http://www.cccep.ac.uk/Events/Past/2011/July/HarryWilting-consumption- based-accounting.pdf 5 EXIOPOL http://www.feem-project.net/exiopol/index.php 6 CREEA http://www.creea.eu/index.php/about 7 Policy Relevance of Consumption Based Accounting, Prof. Arnold Tukker, TNO. PDF slides http://www.cccep.ac.uk/Events/Past/2011/July/ArnoldTukker-policy-relevance-consumption-based-accounting.pdf 8 Tukker et al., 2011, Ecological Economics (in press) 9 Center for International Climate and Environmental Research, http://www.cicero.uio.no/ 10 Supporting Information Appendix . “Growth in emission transfers via international trade from 1990 to 2008”. The Proceedings of the National Academy of Sciences USA (PNAS), 2011. http://www.pnas.org/content/suppl/2011/04/20/1006388108.DCSupplemental/sapp.pdf

Page 111 Given the advanced state of the research it is surprising that the government has consistently claimed that it would be to difficult to measure emissions on a consumption basis. Documents obtained under the Freedom of Information Act show that DEFRA, DECC and BIS have been regularly briefing Ministers and Parliament that measuring embedded emissions is too complicated. For example: “To measure and report on a consumption basis would be extremely complex and increase uncertainty.” And in the same briefing “measuring and reporting emissions on a consumption basis would clearly be an extremely complex, time consuming thing to do, with scope for major inaccuracies”. 11 In a different briefing produced by DEFRA, one of the “key messages” was “Alternative reporting approaches based on consumption of goods and services would be extremely difficult for countries to measure and report on reliably.”12 Yet despite telling Ministers this, such apparent reasons have not stopped DEFRA from continuing to monitor and research consumption emissions, and display them on their website.13

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

Answers in this section aim to point the committee to useful research. Economic modelling indicates that measuring and controlling emissions on a consumption basis could lead to a boost in exports.14 There is also some evidence that it could boost labour productivity.15 Both these topics are explored by Karen Turner at the University of Stirling.16 Measuring emissions on a consumptions basis would also help address carbon leakage. In 2004 130 million tonnes greenhouse gases associated with UK imports originated from countries with no binding climate change targets. 17

11 “Briefing pack – Consumer Emissions (Climate Change) Bill Second Reading Debate, Friday 15 January 2010”. Obtained under FOI, April 2011. http://www.scribd.com/doc/69298520/Upload-1-Annex-a-Request-10-2638 12 Embedded emissions report, DEFRA 2008. Obtained under FOI February 2011 http://www.scribd.com/doc/69601459 13 See 12 14 K. Turner, M. Gilmartin, P.G. McGregor and J.K. Swales, in press with Papers in Regional Science, doi:10.1111/j.1435- 5957.2011.00365.x. 15 ‘Productivity growth, decoupling and pollution leakage’, Nick Hanley et al. In press. Available soon at Stirling Economics Discussion Papers. 16 Slides from presentation “Modelling the impacts of changes in economic activity on consumption measures of pollution generation” http://www.cccep.ac.uk/Events/Past/2011/July/KarenTurner-economic-activity-consumption-measures-pollution- generation.pdf 17 UK Energy Research Council. “Carbon Emission Accounting – Balancing the books for the UK” July 2011

Page 112 Are there any other issues relating to consumption‐based emissions reporting that you think the Committee should be aware of?

The main issue raised here is the government’s lack of transparency to date. The research by SEI and the Carbon Trust clearly shows the UK’s outsourced emissions have outstripped the carbon savings made in the UK. Civil servants have been consistently briefing ministers to this effect. For example as DEFRA state in one briefing prepared by civil servants for ministers “While technological efficiency has improved the CO2 impacts of our products since 1992, the rise in UK consumption has outstripped the improvements achieved”18 and “the Government needs to be cautious about over‐claiming on its achievements in decoupling economic growth from environmental degradation”.19 It is therefore vital that we address this issue rather than trying to avoid it.

However, several documents also reveal that the government has been reluctant to allow the Committee on Climate Change (CCC) to investigate. Further, that careful messaging was developed to deal with the embarrassing questions raised by the UK’s outsourced emissions. As already stated the government has consistently been briefing that measuring emissions on a consumption basis is too difficult, when research indicates this is not the case.

Various documents released under FOI, and public statements by government officials reveal that the government did not want to ask the Committee on Climate Change to investigate the topic of outsourced emissions. For example a “handling note” produced by DECC on the topic included a ready made answer should a DECC official be asked whether the CCC should investigate our sourced emissions. “While it would be possible to ask the Committee to look at embedded emissions, they have more than enough work to do in the next year to keep them very busy.”20 Which is word for word what Lord Faulkner said when speaking on behalf of DECC in the Lords.21 However, the CCC have repeatedly asked to be given the mandate to investigate, and have let other departments know this. For example, a DEFRA Ministerial briefing from December 2010 on the 4th carbon budget stated: “The Government should commission the CCC to look into the implications of considering UK emissions on a consumption rather than a production basis.”22

Several departments produced briefings on how to respond to DEFRA / SEI report including how to answer difficult questions they expected would be result from its publication. For example: “Do UK embedded emissions undermine the international negotiating position?” and “The UK has simply

18 DEFRA “Introduction for Lord Henley 26 May 2010” Obtained under FOI March 2011 http://www.scribd.com/doc/69607224 19 “Briefing pack – Consumer Emissions (Climate Change) Bill Second Reading Debate, Friday 15 January 2010”. Obtained under FOI, April 2011. http://www.scribd.com/doc/69298520/Upload-1-Annex-a-Request-10-2638 20 Briefing pack – Consumer Emissions (Climate Change) Bill Second Reading Debate, Friday 15 January 2010 http://www.scribd.com/doc/69298520/Upload-1-Annex-a-Request-10-2638 21 Hansard, 15 Jan 2010 : Column 747, http://www.publications.parliament.uk/pa/ld200910/ldhansrd/text/100115-0006.htm 22 Upcoming decisions on Carbon Budgets, DEFRA 2010. Obtained under FOI Fe 2011. http://www.scribd.com/doc/70091128/2010-12-FINAL-SCP-Update-Slides

Page 113 exported its emissions over seas”.23 DEFRA recommended releasing the report so it would coincide with “...a series of communication milestones on climate change” and “In adopting this timing we look to get on the front foot and place the report in the context of the range of government action on climate change”24 As the BBC pointed out when the report was published “The government sat on the Defra SEI report since February, tested its calculations, then published it in an obscure press release on 2 July.”25

October 2011

23 Publication of DEFRA research report, Embedded C02 emissions associated with UK imports. 29 May 2008. Obtained under FOI http://www.scribd.com/doc/69593201/BIS-FOI-Appeal-Briefing-Doc-29-May-2008 24 See 21 25 UK in 'delusion' over emissions. BBC News online, 31 July 2008 http://news.bbc.co.uk/1/hi/sci/tech/7536124.stm

Page 114 Memorandum submitted by Manchester City Council (CON 22)

Manchester City Council commissioned independent consultants, Small World Consulting, to undertake a consumption based approach to reporting emissions for the ten local authority areas within Greater Manchester (Bolton, Bury, Manchester City, Oldham, Rochdale, Salford City, Stockport, Tameside Trafford, Wigan). A ‘footprint’ was produced for residents and industry within the region. This research was funded as part of the DECCs Low Carbon Frameworks Pilot. This work was communicated with a number of stakeholders in the production of the Greater Manchester Climate Change Strategy, setting the sub-region a 48% direct carbon reduction emissions target. Stakeholders across the region have discussed how to start considering and implementing a consumption based approach into policy within Greater Manchester. This work has informed our approach and thinking in response to questions below. • How do assessments of the UK’s greenhouse gas emissions differ when measured on a consumption rather than a production basis? Carbon emissions as a result of aviation/shipping can be assigned to consumer/residents purchasing and activity. This prevents carbon emissions for infrastructure such as airports, being assigned to the local authority within which they reside. This is a fairer way of attributing airplane/airport emissions, which serve a much larger region that which they sit within. This approach would sit better with the decision to use DECC Full Data Set or Local Authority emissions statistics (previously National Indicator 186). It is Manchester City Council’s view that for direct emissions, the full data set should be used. Adding a consumption based approach to this, would give a much clearer indication of the UK’s impact on worldwide emissions. Nationally assigned emissions are currently measured in carbon dioxide and not all greenhouse gases (GHGs). Movement to recording all GHGs is also an important and positive step. • 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? Greater Manchester believes that this is feasible to create on a national scale, having created a consumption based footprint for the whole of Greater Manchester (as detailed above), for both industry and residents of each of the 10 local authorities within Greater Manchester. Clear communication is essential to convey that this is not an exact science like production based methodology and there are many assumptions that need to be made when a national set of accounts is derived. What are the benefits and disadvantages associated with taking a consumption-based rather than production-based approach to greenhouse gas emissions accounting? It can help focus policy intervention in a number of areas that aren’t necessarily linked directly to climate change. Considering the results produced for the Greater Manchester study, a large footprint comes from food and waste. With up to a third of food purchased by households being sent to landfill, policy intervention and education could help reduce waste and help the poorest in society. The UK can lead the way in developing this kind of accounting and it may lead to stronger global consensus in trying to reduce carbon emissions as emissions are not simply just put on those countries (e.g. China) who produce the majority of the products that we consume. Climate change doesn’t respect political/geographical boundaries; emissions produced elsewhere in the globe will have an impact here in the UK. Worldwide approach to reducing emissions, greater potential for local (UK) sourcing therefore jobs and investment in local economy. Production and consumption need to be considered.

Page 115 • Is there any evidence of industry relocating from the UK to other countries as a result of UK climate change policy? Rising labour costs are more likely to be implications in countries relocating rather than climate change specific policies, however simply reporting on production based emissions is likely to further encourage more industry to move abroad as the UK strives to solely meet targets set out in the UK Climate Change Act 2008. • Would it be (a) desirable and (b) practicable for the UK to adopt emissions reduction targets on a consumption rather than production basis? Statistics to create a national carbon inventory are all already available, through channels including Office of National Statistics. It would give individuals and organisations greater ownership of their carbon footprint. This would in turn allow them to be more resource efficient and thus reduce emissions. For companies of all sizes this would create ability to identify carbon hotspots within their supply chain. This may open up further opportunities for the local UK economies, as organisations realise that local purchasing can be more cost effective as well as reducing carbon. • 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? Practically, if the UK took the lead in developing a national approach to consumption based emissions, this could give greater credence to negotiations with other countries in establishing emissions reductions as part of Kyoto protocols. • Are there any other issues relating to consumption-based emissions reporting that you think the Committee should be aware of? Consumption based reporting enables individuals and organisations to identify ‘carbon hotspots’ within their supply chains. As energy security becomes weaker and the cost of energy increases, opportunities for local, low carbon production may come to the fore. More local sourcing further enables the “just in time” principal to be further enacted with more efficiency and lower carbon. Companies, particularly SMEs, due to financial constrains often do not take on tackling direct carbon impact with projects that have a longer payback than 3 years. With nationally produced and audited accounts, companies (as well as residents) would be able identify patterns to reduce their carbon with no monetary outlay.

October 2011

Page 116 Memorandum submitted by the Best Foot Forward (CON 23)

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.

Page 117 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?

Page 118 • 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.

Page 119 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

Page 120 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%

Page 121 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

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

Page 122 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 2 embodied emissions in trade (BEED) 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:

2 Embodied emissions in exports less embodied emissions in imports.

Page 123 • 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

Page 124 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 (e.g. 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

Page 125 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.

Page 126 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,

Page 127 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).

Page 128 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 Sa´, 1996).

October 2011

Page 129 References Ahmad N., and Wyckoff A., (2003) Carbon dioxide emissions embodied in international trade of goods. OECD: Paris (France). Bastianoni S., Pulselli F.M., and Tiezzi E., (2004) The problem of assigning responsibility for greenhouse gas emissions. Ecological Economics, 49:253‐57. Carbon Trust, (2011) International Carbon Flows: Background and Theory.

Davis S., and Caldeira K., (2010) Consumption‐based accounting of CO2 emissions. Proceedings of the National Academy of Sciences of the USA, 107(12):5687‐5692. Dodman D., (2009) Blaming cities for climate change? An analysis of urban GHG emissions inventories. Environment and Urbanisation, 21:185‐201. Druckman A., Bradley P., Papathanasopoulou E., and Jackson T., (2007) Measuring progress towards carbon reduction in the UK. Ecological Economics, doi:10.1016/l.ecolecon.2007.10.020. Francis P., (2004) The impact of UK households on the environment through direct and indirect generation of greenhouse gases. Report by the Office of National Statistics: London. Hertwich E. and Peters G., (2009) Carbon Footprint of Nations: a Global, Trade‐Linked Analysis. Environmental Science and Technology, 43:6414‐6420. Hertwich E. and Peters G., (2010) Multiregional Input‐Output Database. OPEN:EU, Technical Document. One Planet Economy Network: Trondheim (Norway).

Jackson T., Papathanasopoulou E., Bradley P., and Druckman A., (2007) Attributing UK carbon emissions to functional consumer needs: methodology and pilot results. RESOLVE, Working paper 01‐07. Kejun J., (2008) Embodied Carbon in Traded Goods. [Online] Available at: http://www.iisd.org/pdf/2008/cph_trade_climate_carbon.pdf, (last access: 14/10/11)

Kondo Y., Moriguchi Y., and Schimizu H., (1998) CO2 emissions in Japan: influences of imports and exports. Applied Energy, 59 (2‐3):163‐174.

Page 130 Larsen H.N. and Hertwich E. G., (2009) The case for consumption‐based accounting of greenhouse gas emissions to promote local climate action. Environmental Science & Policy, 12:791‐798.

Lenzen M., Pade L.‐L., and Munksgaard J., (2004) CO2 multipliers in multi‐region input‐ output models. Economic Systems Research, 16(4):391‐412. Machado G., Schaeffer R., and Worrell E., (2001) Energy and carbon embodied in the international trade of Brazil: an input‐output approach. Ecological Economics, 39(3):409‐ 424.

Munksgaard J. and Pedersen K.A, (2001) CO2 accounts for open economies: producers and consumer responsibility?. Energy Policy, 29:327‐334. Munksgaard J., Pade L.‐L., Minx J., and Lenzen M., (2005) Influence of trade on national

CO2 emissions. International Journal of Global Energy Issues, 23(4):324‐336. Parathanasopoulou E. and Jackson T., (in press) Fossil resource trade balances: emerging trends for the UK. Ecological Economics, 66 (2‐3):492‐505. Peter G.P., (2005) Should consumers or producers be held responsible for climate change? Cicerone, 5, Center for International Climate and Environmental Research: Oslo. Available at: http://www.cicero.uio.no/fulltext/index_e.aspx?id=3840, (last access: 14/10/11). Peters G.P., (2008) From production‐based to consumption‐based national emission inventories. Ecological Economics, 65:13‐23.

Peter G.P., and Hertwich E.G., (2008) CO2 Embodied in International Trade with Implications for Global Climate Policy. Environmental Science and Technology, 42 (5):1401‐1407. Peters G.P. and Hertwich E.G., (2008a) Structural analysis of international trade: environmental impacts of Norway. Economic Systems Research, 18(2):155‐181. Rees E., (2011) UK’s greenhouse gas emissions reductions an ‘illusion’. Ecologist, 2/2/2011. Schaeffer R., and Leal de Sa´ A., (1996) The embodiment of carbon associated with Brazilian imports and exports. Energy Conversion and Management, 37 (6‐8): 955‐960.

Page 131 Stockholm Environment Institute (SEI), (2008) Development of an embedded carbon emission indicator. DEFRA: London. Wyckoff A.W. and Roop J.M., (1994) The embodiment of carbon in imports of manufactured products. Energy Policy, 22 (3): 187‐194.

Page 132

Memorandum submitted by the Construction Products Association (CON 24)

Who we are The Construction Products Association is the umbrella body for manufacturers and suppliers of construction products in the UK and our membership consists of the 24 major companies in the industry as well as 43 sector trade associations and collectively these represent 85% by value of the industry. The products sector has an annual turnover of more than £50 billion, accounts for 40% of total UK construction output and is 4% of GDP.

The sector is a crucial component of the coalition government’s strategy for manufacturing to spearhead the growth so desperately needed in the economy.

More than 80% of construction products used in the UK are still manufactured in the UK.

How we contribute to the climate change debate Our members are at the forefront of manufacturing and supplying the products and materials that will improve the energy efficiency of our homes, offices, schools and hospitals, capture renewable energy, build new power stations and deliver the low carbon built environment that we all seek. As well as supporting the need for these measures to help reduce carbon emissions, we also believe this represents a great business opportunity. Our members are therefore not adverse to the need to measure and report on their greenhouse gas emissions.

The case for consumption-based greenhouse gas emissions’ reporting • The Association supports strongly the need for government to measure and report greenhouse gas emissions based on consumption of goods in the UK and not just those emissions emitted during production, only then will we have an accurate picture of the contribution of the UK to global greenhouse gas emissions.

• Currently the greenhouse gas content of products that are imported is not measured. This gives not only a skewed picture of progress in decarbonising our economy but may perversely result in efficient low carbon manufacturing in the UK being forced overseas as its higher price cannot compete with cheaper, probably less efficient and more carbon intensive imports entering the UK “carbon–free”.

• In construction, the government is giving strong policy direction to the need to decarbonise manufacturing and to provide the products that will deliver low carbon buildings and infrastructure, but until procurement is based on carbon intensity rather than lowest costs, this will not happen. Whilst procurement remains based on lowest cost then cheaper imports manufactured in less efficient and more carbon intensive ways will outcompete UK-base manufacturing industries. This will not deliver the manufacturing jobs that are needed to grow the economy.

• We believe that measuring greenhouse gas consumption in the UK will therefore contribute to the much-needed level-playing field for UK based industries to compete.

• If our manufacturing sector departs overseas then the result is that we will have simply outsourced our carbon emissions, along with the jobs and prosperity of many,

Page 133 which is neither good for our society, economy, nor the global environment. Driving production overseas, only to import the needed products back into the UK free from carbon measurement, is a perversity that must be overcome. With a growing population in the UK, plus the need to refurbish the 26 million existing homes to a high standard of energy efficiency, will require many more construction products to be used in the years ahead.

• We note, in addition, that according to a September 2011 response by DFID to the Environmental Audit Committee* (Page 12, report citation below), the UK already accounts for carbon dioxide emissions associated with UK consumption of all goods and services, whether or not the emissions are generated within the UK. They include emissions from international travel and the production and transportation of imported goods, but not emissions from production of goods for UK export. These were reported in the 2010 Sustainable Development Indicators. The graph of UK consumption is given in http://sd.defra.gov.uk/progress/national/

If this is indeed the case then the question must be how robust is this data and can it be expanded beyond carbon to greenhouse gas emissions.

• We are very keen to have the opportunity, with the major companies in our sector, to present to the Committee on the points raised above. These are absolutely critical to the security of a manufacturing base in this country which will help deliver the built environment in a sustainable way.

*The impact of UK overseas aid on environmental protection and climate change adaptation and mitigation: Government Response to the Committee's Fifth Report of Session 2010–12 Ordered by the House of Commons to be printed 14 September 2011

October 2011

Page 134 Memorandum submitted by the Public Interest Research Centre (CON 25)

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 £4bn 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.

Page 135 • 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 3 worse case, are anticipated to increase to 908MtCO2. 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.

Page 136 PIRC calculates that in 2004 the UK evaded at least £4bn 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 2009‐2013.13 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 2010‐2050… 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

Page 137 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 concerns29. 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?

Page 138

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 twenty 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

Page 139 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 (e.g. 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:

Page 140 38 emissions embedded in trade have grown from 4.3 GtCO2 in 1990 to 7.8 GtCO2 in 2008. 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 (e.g. 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

Page 141 Endnotes

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 £4bn 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 = £4.6bn. 5 Chancellor of the Exchequer, George Osborne, speech to Conservative Party Conference, 3rd 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_em issions/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.

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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 2008’, 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’, 3rd 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, 30th 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, 3rd June 2011, available online

Page 143 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, 21st 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.

Page 144 Memorandum submitted by EDF Energy (CON 26)

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.

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

Page 145 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.

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.

Page 146 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

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

Page 147 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.

Page 148 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

Page 149 Memorandum submitted by the Grantham Research Institute (CON 27)

Submission from Grantham Research Institute on Climate Change and the Environment at the London School of Economics and Political Science

About the authors: Alex Bowen is principal research fellow at the Grantham Research Institute on Climate Change and the Environment at London School of Economics and Political Science Baran Doda is research assistant (post‐doctoral researcher) at the Grantham Research Institute on Climate Change and the Environment. Sam Fankhauser is acting co‐director at the Grantham Research Institute on Climate Change and the Environment. The work of the Grantham Research Institute is integrated with the activities of the Centre for Climate Change Economics and Policy (CCCEP), hosted by LSE and the University of Leeds. CCCEP is funded by the UK Economic & Social Research Council and Munich Re.

This submission provides input to the inquiry by the Energy and Climate Change Committee which seeks to study

“… 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.”

It addresses the three specific questions put forward by the committee.

1. How do assessments of the UK’s greenhouse gas emissions differ when measured on a consumption rather than a production basis? 2. What are the benefits and disadvantages associated with taking a consumption‐based rather than production‐based approach to greenhouse gas emissions accounting? 3. Would it be (a) desirable and (b) practicable for the UK to adopt emissions reduction targets on a consumption rather than production basis?

The arguments set out in the paper are those of the authors and not necessarily of the Grantham research Institute for Climate Change and the Environment

Submission Summary

The following bullets summarize the central arguments of this submission:

• There is a growing gap between the UK’s consumption‐ and production‐based emissions, driven mostly by a substantial increase in the former. Consumption‐based emissions associated with net imports from the rest of the world to the UK more than quintupled, from

about 29 MtCO2 in 1990 to almost 160 MtCO2, in 2008. • The counterpart to the UK’s experience is that of China, where the difference between

production‐ and consumption‐based emissions increased more than fivefold to 1330 MtCO2 between 1990 and 2008.

Page 150 • The UK’s experience of persistently widening difference between consumption‐ and production‐based emissions is broadly similar to that of the US, G7 and Annex I countries. • The driving forces behind these trends are complex and intertwined. They include globalization, non‐carbon distortions that have a bearing on trade patterns, structural change associated with development and carbon leakage. More research is needed to understand fully the relative contributions of each mechanism. • Given these discrepancies, there would be substantial informational benefits from adding a consumption‐based emissions‐accounting approach to the existing production‐based method. • However, moving to pure consumption‐based accounting is not advisable. There is much more uncertainty in consumption‐based accounts than production‐based accounts, and the accuracy of reporting would suffer. • Nor are consumption‐based carbon targets the way forward. Consumption‐based targets only make sense if policy‐makers are given the levers to reduce the carbon embedded in imports (e.g. through border adjustments). At the moment, this is not realistic.

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

1.1. Recent research is unambiguous that there exists a sustained divergence between UK’s 1 consumption‐ and production‐based CO2 emissions (CBE and PBE hereafter). This

submission draws on the empirical results for CO2 emissions in Peters et al (2011) to illustrate this divergence and place it in a broader international context. 2 In particular,

1.1.1. Whereas UK’s PBE has declined between 1990 and 2008, its CBE has increased by

16.8% over the same period. The excess of CO2 emissions associated with UK consumption over emissions actually located in the UK, i.e. the quantity (CBE‐PBE),

more than quintupled to almost 160 MtCO2. In other words, the UK’s imports

embodied increasingly greater quantities of CO2 relative to its exports, and the net

balance of CO2 increased from about 5% to 30% as a share of PBE. This is illustrated in Figure 1 below. 1.1.2. The counterpart to the UK’s experience is that of China, where both PBE and CBE have increased between 1990 and 2008, but the former by much more than the

latter. The net difference also increased by more than fivefold to 1330 MtCO2. As a share of PBE, the net difference increased from 10% to 19%. This is shown in Figure 2 below. 1.1.3. In an international context, the UK’s experience of a widening excess of CBE over PBE is broadly similar to that of the US, G7 and Annex I countries. This can be observed in Figure 3 below.

1 See, for example, Baiocchi and Minx (2010), Wiedmann et al (2008 & 2010), and Helm et al (2007) for research focusing on the UK only. Other recent studies which work with a larger sample of countries but include the UK include Atkinson et al (2011), Peters et al (2011), Davis et al (2011) and Caldeira and Davis (2010). Wiedmann et al (2010) is unique among these to analyse trends in GHG emissions other than CO2. 2 Emissions in this submission refer to CO2 emissions only.

Page 151

1.2. Another way of viewing these trends is to note that if all international trade ceased tomorrow, the UK, and Annex I countries more generally, would not have enough domestically produced carbon‐intensive goods and services to satisfy their domestic demand. Conversely, China and non‐Annex I countries would have too much. 1.3. Most Annex I and non‐Annex I countries have increased their CBEs since 1990. Consequently, global emissions have risen. In contrast, PBEs have remained stable or even declined in some countries (like the UK), indicating a profound reshuffling of production patterns where carbon‐intensive production has migrated away from rich countries. 1.4. The driving forces behind these trends are complex and intertwined. First, globalization and increased trade flows have played a key part and to the extent that this reorganizes production based on comparative advantage, it must be welcomed. Second, economic

distortions which are neutral with respect to CO2 embodied in trade (e.g. the alleged undervaluation of the Chinese currency) as well as those that may have non‐neutral effects (e.g. tax rebates to support production in China’s energy‐intensive sectors3) have an important bearing on the resulting configuration of production across countries. Third,

structural change associated with the economic development process will increase the CO2 intensity of production in developing countries as these countries’ productive inputs are allocated away from agriculture and towards industry. 1.5. Another mechanism that is consistent with the above trends is carbon leakage.4 Without making a judgement regarding the relative importance of this channel, it is important to note that the trends described above start before there was any significant policy

intervention directed at reducing CO2 emissions. Furthermore, the patterns observed for the regulated UK and the unregulated US are broadly similar, suggesting that carbon leakage cannot be the only, or even the main, channel at work. 5

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

2.1. A production‐based approach to emissions accounting has several benefits. Most importantly, the data it requires are relatively easy to collect and uncontroversial to measure, particularly for energy‐related emissions. It also allows the tracking of emissions intensity over time. By using a production‐based method, it is possible to gain a deeper understanding of the implications of production technologies on emissions, and construct policies that incentivise directly the development and adoption of the clean technologies we need in a carbon‐constrained world. 2.2. However, the production‐based approach is uninformative about the consequences of alternative cross‐country consumption patterns in a globalizing world. In fact, it obscures the mounting imbalance in the system. For example, under the trends identified above even if/when Annex I countries decarbonise their production completely, the climate change

3 See Pan et al (2008). 4 Carbon leakage refers to the process whereby emissions in one country increase as a result of industries relocating there from a second country with a stricter climate policy. 5 On the implications of carbon leakage for the UK see Carbon Trust (2010).

Page 152 problem will not be solved unless non‐Annex I countries achieve substantial decarbonisation of their production on behalf of both Annex I and non‐Annex I consumers. 2.3. Against this backdrop, a consumption‐based emissions accounting method has significant informational benefits when used as a complement to the existing production‐based system.

It links the CO2 emitted during the production process of a good with the ultimate beneficiary of those emissions, the consumer, who may be far removed from the production process. It raises public awareness and encourages consumers to take responsibility for the emissions associated with their consumption regardless of where those emissions take place. Finally, it highlights the necessity of additional research to establish the relative contribution of the driving mechanisms identified in paragraphs (1.4) and (1.5), which is crucial for the design and implementation of efficient and equitable climate‐change mitigation policies. 2.4. The main disadvantage of a consumption‐based accounting method relates to measurement. The calculation of emissions embodied in trade is inherently complex. They require assumptions based on aggregate data which may not hold for individual exporters. For example, how do we account for the carbon content of an imported Chinese machine if the firm which produced it used intermediate inputs and technologies that are less carbon‐ intensive than the industry average in China?

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

3.1. It is important to understand the difference between the adoption of an accounting method (a way to measure emissions) and the adoption of emissions reduction targets based on consumption emissions (a framework to reduce emissions). Although there are significant benefits associated with accurately measuring and reporting consumption emissions, there are a number of practical obstacles to the design and implementation of consumption‐based emissions reduction targets. 3.2. The efficient implementation of consumption‐based targets would require the taxation (or equivalent policies) of all final goods and services, including imports, according to their carbon content. It would require accurate measurement of embodied carbon emissions at a high resolution, a complex border adjustment system with regular updates based on technological innovation in origin countries and sectors, and would have to be resilient to challenges at the WTO. Regarding the latter, Atkinson et al (2011) report average border adjustment rates of about 10% for key developing country exporters such as China, India and

South Africa based on a carbon price of $50/tCO2. 3.3. An administratively less demanding alternative would be to focus on those internationally traded goods and services that embody large quantities of carbon, and pursue regional and sectoral agreements specifically and narrowly for these goods. This solution is not without its own drawbacks. Although it may be easier to reach an agreement within a smaller group, such an agreement may be inefficient (compared to a truly global deal) and likely be challenged at the WTO as well. 3.4. Given these obstacles, carbon policies based on emissions at the point of production offer significant advantages. They make effective use of information by providing incentives to

Page 153 those with the power to make the emissions reductions decisions. Also they have relatively low monitoring and enforcement costs. 3.5. Consequently, in the current economic, institutional and political landscape, it is neither desirable nor practicable to adopt consumption‐based emissions reduction targets. That said, the current system which is built around production‐based emissions targets needs improvement because it is not optimized for the extent and pace of globalization. In other words, the key aspect of the current system that needs strengthening is not the accounting basis of the targets, but the degree of international agreement around the targets that will allow us to address climate change in an increasingly globalized world.

October 2011

Figures

Figure 1: United Kingdom Production- versus consumption-based emissions -.05 700 -.1 650 -.15 MtCO2 -.2 600 -.25 550 Net exports CO2of (share of PBE) -.3 1990 1995 2000 2005 2010 year

PBE (left) CBE (left) (PBE-CBE)/PBE (right)

Source: Peters et al (2011)

Page 154 -.15 -.1 -.05 0 MtCO2 1990

Source: Peters et al (2011) al et Peters Source: 2000 3000 4000 5000 6000 7000 1990 Source: Peters et al (2011) al et Peters Source: Figure 3: Net exportsof CO2 (share of PBE) Production- versus consumption-based emissions 1995 1995 (PBE-CBE)/PBE (right) (PBE-CBE)/PBE PBE (left) Figure 2: China Annex I Annex US Page 2000 year 2000 year 155 2005 G7 CBE CBE (left) 2005 2010

2010 .1 .12 .14 .16 .18 .2 Net exports of CO2 (share of PBE)

References:

Atkinson G; Hamilton K; Ruta G; van der Mensbrugghe D (2011). Trade in virtual carbon: Empirical results and implications for policy. Global Environmental Change, vol. 21, p. 563‐574.

Baiocchi G; Minx J C, (2010). Understanding changes in the UK’s CO2 emissions: A global perspective. Environ Sci Technol, vol. 44, p. 1177‐1184.

Caldeira K; Davis S J (2010). Consumption‐based accounting of CO2 emissions. PNAS, vol. 107, p. 5687‐5692

Caldeira K; Davis S J; Peters G P (2011). The supply chain of CO2 emissions. PNAS, Early edition.

Carbon Trust (2010). Tackling carbon leakage ‐ Sector‐specific solutions for a world of unequal prices (CTC767)

Wiedmann T; Wood R; Lenzen M; Minx J C; Guan D; 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.

Helm D; Smale R; Phillips J (2007) Too good to be true? The UK’s climate change record; Technical Report.

Peters G P; Minx, J C; Weber C L; Edenhofer, O, (2011). Growth in emission transfers via international trade from 1990 to 2008. PNAS, vol. 108(21), p.8903‐8908.

Wiedmann T; Wood R; Minx J C; Lenzen M;Guan D; Harris R, (2010). A carbon footprint time series of the UK– results from a multi‐region input–output model, Economic Systems Research, 22:1, 19‐ 42.

7

Page 156 Memorandum submitted by Tyndall Manchester, Sustainable Consumption Institute and Stockholm Environment Institute (CON 28)

Please find enclosed a submission by a selection of researchers from the Sustainable Consumption Institute and the Tyndall Centre, University of Manchester, and from the Stockholm Environment Institute, University of York. All views contained within are attributable to the authors and do not necessarily reflect those of researchers from the wider Sustainable Consumption Institute, Tyndall Centre, Stockholm Environment Institute or University of Manchester.

• Dr Elena Dawkins, Stockholm Environment Institute, University of York • Dr Ruth Wood, Sustainable Consumption Institute & Tyndall Centre, School of Mechanical, Civil and Aerospace Engineering, University of Manchester • Dr Alice Bows, Sustainable Consumption Institute, School of Mechanical, Civil and Aerospace Engineering, University of Manchester • Dr Mirjam Roeder, Sustainable Consumption Institute, School of Mechanical, Civil and Aerospace Engineering, University of Manchester • Dr Paul Gilbert, Tyndall Centre, School of Mechanical, Civil and Aerospace Engineering, University of Manchester • Dr Conor Walsh, Sustainable Consumption Institute and Tyndall Centre, School of Mechanical, Civil and Aerospace Engineering, University of Manchester

Executive Summary

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

Analyses show UK GHG emissions measured on a consumption basis are consistently higher than those on a production basis. Furthermore, this gap is widening as consumption emissions are increasing, despite territorial emission reductions.

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?

Whilst it is possible to develop a robust methodology for measuring emissions on a consumption basis, consumption‐based accounts have a higher uncertainty than territorial accounts.

Current consumption‐based emissions estimates use various different national and international economic and environmental datasets from a range of sources and these require data processing to combine into an appropriate framework. The necessary harmonization of differing datasets can generate uncertainties, developing a standardised harmonization and data validation and verification process is the main challenge.

Page 157 The challenges presented by consumption‐based accounting fall into two areas; the underlying challenges of the modelling approach in terms of complexity, time requirements or uncertainties; and the challenges posed by the data limitations and restrictions.

There are two main methodologies that are suitable for estimating consumption emissions at a national level; a multi regional input‐output model (MRIO) and an ‘emissions embodied in trade’ method. The results from these methods will vary depending on the model used, the underlying datasets and how the model is structured.

Peters (2008) highlights that calculating emissions embodied in trade is less complicated than developing global EEIO models (the multi‐regional input‐output approach), but only deals with bilateral trade flows at the country level and therefore not as suitable as MRIO for looking at the full supply chain impacts of the final consumer.

According to Wiedmann et al. (2010), there are key challenges associated with MRIO including:

‐ collection of and access to environmental data at a high level of sectoral and source detail; ‐ sectoral detail of national accounts; ‐ country coverage; ‐ and the support of national and international statistical authorities and agencies who provide the input data.

Wiedmann et al. (2010) note that whilst most of the major MRIO projects are supported through public funding and consequently made publically available, there is further scope for producing more open source data and increasing transparency of data transformations and assumptions made within the models and the reproducibility of the methods.

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

National perspective Consumption‐based emissions accounting provides a complementary perspective to production‐based or territorial emissions accounts. It is particularly relevant linking trade and climate policy due to its inclusion of imports; a valuable indicator for countries where emissions mitigation targets are met domestically, but an increasing level of consumption continues by importing emissions intensive goods from elsewhere. This becomes even more relevant for climate change policy if those goods are imported from countries without any binding targets for emissions reductions themselves.

If a multi‐regional input output (MRIO) method is used for consumption‐based emissions accounting, it can be applied to any level of consumption because all supply chain emissions are allocated to the final consumer. This has the benefit of engaging individuals or communities in their personal contribution to emissions, and could be useful for mitigation efforts to change behaviours or practices domestically1. It can also demonstrate the different responsibilities for components of a carbon footprint; with the possibility to

1 See for example REAP Petite – a community footprint calculator: http://www.reap‐petite.com/

Page 158 explore both the contribution of a producer or industry and the consumer (individually) or level of consumption (nationally). At the national scale, for higher level consumption emission inventories, methods such as emissions embodied in trade or time series with trade (Peters et al., 2011) would demonstrate the emissions associated with trade, which production‐based accounts currently do not show.

Combining both production and consumption‐based accounts is useful for climate change mitigation policy and decisions. Experience of organisations such as Stockholm Environment Institute (SEI) and the Sustainable Consumption Institute suggest that both consumption and production accounts should be maintained and published regularly as opposed to one or the other; especially as estimates for production‐ based emissions are required as an input to consumption‐based accounts anyway.

Sector perspective

With particular reference to the agricultural sector, using both a consumption and production‐based approach helps to classify the source and end‐user of emissions. Production in some regions where demand is increasing is projected to be limited by climate change impacts and a greater number of countries may rely on a few main producers. With this outlook producers in the ‘favoured’ regions need to maximise their yields and land‐use efficiency to maintain global food supply. However, this will necessitate a higher use of agrochemicals, particularly nitrogenous fertilisers, increasing greenhouse gas emissions within those territories. The result of this may be a disincentive to increase production in these countries if the production‐based accounting remains without being informed by the consumption‐based approach. This would be counterproductive to global food security aims and poverty reduction.

With particular reference to the international transport sectors, under the producer‐based approach, international shipping (and aviation) emissions are excluded, as the majority of emissions are released in international waters (and airspace). Nonetheless, the amount of bunker fuel sold by a nation is reported to the UNFCCC by Annex 1 nations as a memo item. This current method of reporting was described by the Environmental Audit Committee as being inadequate to represent the UK’s actual share of international shipping emissions (EAC, 2009). By taking a consumption‐based approach, the emissions released from international shipping (and aviation) would be automatically included in the emission accounts. The international shipping (and aviation) emissions would then constitute part of the embedded emissions that are released along the goods or services supply chain. It should be noted however, that shipping is not well represented in existing MRIO‐related databases, and this would need to be addressed.

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

(a) Desirable:

It would bring together climate policy and trade, which would tackle the common critique of production‐ based accounting for not including the emissions associated with imported goods. Under production‐based

Page 159 targets the consumption of imports and their associated embedded emissions can continue to increase without any monitoring, but a consumption‐based target would include these emissions.

The consumption approach can demonstrate the role that consumption plays in counteracting emissions mitigation efforts, if growing consumption outweighs the efficiency improvements domestically or from imports then this would be evident from the consumption‐based accounts.

The consumption‐based approach would mean the UK taking more responsibility globally for the emissions that are generated to support growing levels of domestic consumption. This would increase the share of global emissions over which the UK has influence, and therefore broaden its reach over the climate outcome of an increase in emissions (Bows and Barrett, 2010).

(b) Practicable

Nationally, work would need to be done to collect and publish the necessary datasets more frequently in order to produce timely and robust consumption‐based emissions estimates for regular accounting and monitoring. It may not be possible to use a full MRIO approach for measuring against targets as it is reliant on global trade data and models, which are not produced annually due to their data intensive production process. Alternative methods such as emissions embodied in trade (see Peters, 2008) or time series with trade (see Peters et al., 2011) could be used to generate annual consumption‐based accounts, but this is also likely to require additional work to publish the necessary input datasets more regularly. As Peters, 2008 notes, MRIO is most useful for product or consumption specific studies and a method such as emissions embodied in trade would be more useful for national emissions inventories limited to bilateral trade flows. Solely consumption‐based national emissions inventories would suffer from higher complexity and uncertainty and lower transparency than production‐based accounts.

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

This is outside our sphere of research

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?

If the UK were to adopt consumption‐based accounting alongside production‐based accounting then this would demonstrate internationally that the UK is taking into account the emissions impacts arising from trade. If the model used to calculate the consumption‐based emissions can provide the necessary detail then it could also be used to identify potential carbon leakage from countries with binding targets to those without, demonstrating the UK’s understanding of the importance of making progress towards emissions reductions on a global scale.

If the UK adopted a solely consumption‐based approach to emissions accounting then the UK would have to work closely with other countries to encourage mitigation efforts abroad to reduce the impact of any imported goods to the UK.

Page 160 Detailed Consultation Response

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

Background 1.1 Production‐based greenhouse gas (GHG) emissions accounts include the emissions released within a national territory. Exact inclusions or exclusions vary depending on the reporting framework, but in general they include GHGs released from burning fuel and chemical processes in industry or households (and sometimes removals) taking place within a national boundary. Consumption‐based GHG emissions accounts include the emissions embedded along the supply chain of goods and services that people in a particular country consume, regardless of where those goods and services are produced and the emissions released. A significant difference between the two approaches is how they treat trade, with production‐based accounts including emissions associated with goods and services for export, but excluding imports, and consumption‐based accounts including imports, but allocating export emissions to their country of destination.

1.2 There have been a number of consumption emissions studies completed for the UK. Accounts, such as those produced by REAP (Resources and Energy Analysis Programme) at Stockholm Environment Institute (SEI), University of York, or those published in academic literature by J. C. Minx et al. (2009), Druckman and Jackson (2009), Wiedmann et al. (2010) and Peters et al. (2011) have found that consumption‐based emissions are consistently higher than production‐based estimates. All of these models apply an environmentally extended input‐output approach in some form to estimate the consumption‐based emissions for the UK, but vary in the datasets and methods that they use (the differences between accounting methods are described in the following sections).

1.3 Examples of specific reports on consumption‐based emissions accounts or calculations of emissions embodied in trade for other countries include: Munksgaard and Pedersen (2001) – Denmark; Machado, Schaeffer, and Worrell (2001) – Brazil; Peters and Hertwich (2006) – Norway; Bang et al. (2008) – Europe; Yunfeng and Laike (2010) – China; Z. M. Chen and Chen (2011) – G7 and BRIC; Berglund (2011) – Sweden; Whilst this list is by no means exhaustive it gives an indication of the work internationally on consumption‐based accounting. This list also excludes the larger projects such as EXIOPOL or OPEN:EU at the European level which have generated consumption‐based accounts for a large number of countries simultaneously using environmentally extended multi‐ regional input‐output models. These projects are also explained in more detail in the following sections.

Emissions Comparison 1.4 The REAP model generates consumption‐based footprint estimates for the UK and disaggregates this data to local authority level. The data from REAP for 2006 are shown in Table 1 and compared to nationally published production‐based GHG statistics for the same year. For each of the data sources

the measure of GHGs includes the following pollutants: CO2, CH4 and N2O and HFCs, PFCs and SF6. The production‐based emissions accounts vary depending on the reporting requirements – with

Page 161 2 UNFCCC data taken from Environmental Accounts, but excluding bunker fuels, CO2 emissions from biomass, adjustments for tourism abroad and including crown dependencies and land use change.

DECC archive of annual statistics3 2006 – UNFCCC Office of National Statistics REAP Data 2006 – reported Production Environmental Accounts, Consumption Emissions Emissions 2008 – Production Emissions

Total Carbon Total GHG Greenhouse Gas, Footprint Footprint (Mt Kyoto greenhouse gas atmospheric emissions, 2006

(Mt CO2) CO2 eq) basket, (Mt CO2 eq) (Mt CO2 eq) 733.08 983.94 652.3 724.46

Table 1 A comparison of emissions datasets

Figure 1 below shows the REAP breakdown of the GHG footprint by theme for 2006.

Figure 1 Direct and indirect emissions breakdown of the UK per capita footprint, by theme, 2006

1.5 The REAP dataset also includes a time series of consumption‐based emissions from 1992‐2006, this is compared to UNFCCC reported figures for territorial emissions4 from the same time period in Figure 2. This demonstrates the increasing difference between consumption and territorial emissions accounts over time.

2 United Nations Framework Convention on Climate Change 3http://www.decc.gov.uk/en/content/cms/statistics/climate_stats/gg_emissions/uk_emissions/archive/archive.aspx 4 Taken from the Department of Energy and Climate Change (DECC): http://www.decc.gov.uk/en/content/cms/statistics/climate_stats/gg_emissions/uk_emissions/archive/archive.aspx

Page 162

Figure 2 A time series of GHG Consumption Emissions and UNFCCC Reported Emissions 1992‐2006

1.6 Wiedmann et al. (2010) has produced a time series consumption emissions dataset for CO2 alone

(Figure 2 shows both CO2 and non‐CO2 greenhouse gases) from 1992‐2004 and this is shown in Figure 3 below, with a comparison to production emissions from the UNFCCC submission and UK Environmental Accounts from the Office of National Statistics. This study also found that there has been an increase in UK consumer emissions over time and a widening gap between producer and

consumer emissions. Net CO2 emissions embedded in UK imports increased from 4.3% of producer emissions in 1992 to a maximum of 20% in 2002.

Figure 3 The CO2 emissions from 1992‐2004 according to different accounting principles (Wiedmann et al. 2010).

Page 163 1.7 Peters et al. (2011) have also produced a time series of consumption‐based emissions which, due to a difference in methodological approach (explained in more detail below) gives another set of consumption emission estimates for the UK. However, despite the differences in methodology and total values, the conclusions are similar to the studies mentioned above – with a widening gap between territorial and consumption emissions between 1990 and 2008 in the UK.

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 Whilst it is possible to develop a robust methodology for measuring emissions on a consumption basis, consumption‐based accounts have a higher uncertainty than territorial accounts. As Peters (2008) states, “production‐based inventories are much closer to the statistical source than consumption‐based inventories and therefore have lower uncertainty”. Consumption‐based accounts generate an increased level of uncertainty from the reallocation of emissions from technologies to sectors and the inclusion of import data. In terms of challenges, these factors are inherent in the accounting approach, rather than a challenge to overcome.

2.2 Accepting the increased uncertainty of the consumption‐based approach as a whole, the data availability and modelling approach used to calculate the emissions can also vary between studies, giving differing national consumption‐based inventory results depending on the method employed.

Background

2.3 The diagram in Figure 4, taken from Wiedmann et al. (2010), shows the data requirements for consumption and production‐based indicators. The exact numerical difference between territorial and emissions accounts depend on the methodology employed to estimate the emissions associated with each number in the diagram. To calculate the full supply chain emissions associated with consumption, carbon emitted during the production of goods or services must be reallocated from the point of release to the final product that is consumed. To do this the emissions associated with different goods and services must be tracked along supply chains, which are often complex involving numerous industries and processes. One method for tracking emissions along supply chains throughout an economy is environmentally‐extended input‐output (EEIO) analysis5, which is the method behind the data presented in response to question 1 above. EEIO is a form of life cycle analysis (LCA), but using a top‐down macro‐economic approach, as opposed to bottom‐up or process LCA which looks at products individually6.

5 Environmentally extended input‐output (EEIO) analysis is well documented in the literature, see Miller and Blair (2009). 6 For a full guide to input‐output analysis see Miller and Blair (2009); Leontief (1970); Leontief (1986).

Page 164 PRODUCTION CONSUMPTION (UK intermediate demand) (UK final demand)

1 2

Production in the UK 3a

3b Final consumption Exports from in the UK the UK PRODUCTION in Rest of World

4a 3 4 4b Production in Regions e, o and w 5a, 5b

Arrows should be read as “Emissions generated by [beginning of arrow ] attributed to [end of arrow ]” Territorial Emissions(production-based indicator): 1 + 2 + 5a + 5b Consumer Emissions(consumption-based indicator): 1 + 3a + 4a + 5a + 5b

Figure 4 Emissions Accounting Diagram based on Wiedmann et al. (2010)

2.4 EEIO analysis uses a number of different national and international economic and environmental datasets from a range of sources and these require a certain level of data processing to combine into an EEIO framework. The necessary harmonization of differing datasets can generate uncertainties.

Modelling framework

Input­output tables 2.5 The economic input‐output tables (IOTs) that represent the interactions between industries’ (supply chains) are used as part of the EEIO framework and they can vary in level of industry detail and countries that they include. If symmetric input‐output tables (SIOT) are not available for the year of interest then estimates have to be made based on economic supply and use tables (SUT).

2.6 To generate a full consumption account the framework must include emissions associated with traded goods (imports and exports). This data can be incorporated in a number of ways, with different methods producing different emissions results. Single region models would just represent the interactions between sectors in one country, with the assumption that any imported goods have the same emissions intensity as those produced domestically (domestic technology assumption).

2.7 Multi‐region input‐output (MRIO) models represent interactions between numbers of countries, including both international and domestic supply chains. EEIO models with different regions (total numbers and the actual countries included) will give different consumption emissions figures for the country of interest. In addition, the emissions datasets available for those regions and the data that describes how they interact with consumers and industry in the country of interest may also differ between models.

Page 165 Input­output data sources 2.8 Across the world, modelling frameworks for consumption‐based emissions accounting tend to use either nationally published input‐output (IO) or ‘supply and use’ tables combined with environmental accounts and import data in single region models with domestic technology assumptions, or MRIO models with larger numbers of regions, based on international datasets such as the Global Trade Analysis Programme7 (GTAP) or EXIOPOL8. The consumption‐based emissions estimates will be different depending on the IO tables and model used. In some cases, global models are used as a starting point and then aggregated to regions of interest; this again produces a variation in results.

2.9 Generating a global set of IO tables for use in MRIO requires considerable data processing and has become available through specific projects or work by individuals such as Hertwich and Peters (2010) for the One Planet Economy Network in the EU (OPEN:EU). The method for generating the environmentally‐extended input‐output model for 113 regions is described in the OPEN:EU technical document and is based on GTAP data which was converted to a full MRIO model.9 The consumption account data for 45 countries (including the UK) will shortly be published in the EUREAPA tool which is an output of this project10.

2.10 Tukker et al. (2009) document the steps they took for producing the EXIOPOL environmentally‐ extended MRIO model, firstly identifying the limitations with existing data sources and then presenting their method to overcome these and deliver the model. They noted that the current data sources at the time provided only supply and use tables and input‐output tables for single countries, without trade links. In addition, the sectoral and product detail was limited and environmental extensions were either lacking or limited in scope. They stated that a key difficulty was the lack of harmonization of data across countries and this is one of the reasons that any MRIO modelling work will inevitably include data harmonization and manipulation. They conclude by stating that trade‐linked tables are essential for analysing the effects of sustainability measures taken in Europe on Europe's economic competitiveness and, they believe that, from a theoretical viewpoint, the environmentally‐extended MRIO approach is best way of taking trade into account. However, they also state that existing studies tend to be aggregated at sector and regional level and to focus on a fairly small number of environmental extensions.

2.11 Wiedmann et al. (2010) identify five projects that have or are about to complete MRIO databases, with full trade matrices between all countries:

• The Asian International Input‐Output Table by IDE/JETRO: symmetric input‐output tables with nine Asian countries, plus the USA with 76 sectors. • The Eora database by the University of Sydney: a global MRIO time series with 130 countries • The EU funded EXIOPOL database with supply and use tables for 27 EU countries and 16 non‐EU countries and 130 sectors (as described above)

7 https://www.gtap.agecon.purdue.edu/ 8 http://www.feem‐project.net/exiopol/ 9 http://www.oneplaneteconomynetwork.org/resources/programme‐ documents/WP1_MRIO_Technical_Document.pdf 10 More details are available from: http://www.oneplaneteconomynetwork.org/eureapa.html

Page 166 • GTAP data; covering 113 countries/world regions and 57 sectors. It does not include full trade matrices between all countries in the database itself, but can be converted to do so as completed for the OPEN:EU project described above. • The World Input‐Output Database Project (WIOD) from the University of Groningen which aims to create a time series of supply and use tables and symmetric IO tables from 1995‐2006 for 27 EU countries and 13 other countries, with 35 industries and 59 product sectors.

Key uncertainties in EEIO modelling – challenges to overcome 2.12 Andrew, Peters, and Lennox (2009) use an MRIO model based on GTAP data to quantify the errors introduced by various approximations of the full MRIO model and found that the frequently used domestic technology assumption (DTA) inaccurately estimates the carbon footprint for many countries. The errors are due to globally unrepresentative emission intensities and/or production technologies. They recommend that when applying the DTA, domestic emission intensities should be carefully validated against global estimates, especially for commodities with large import volumes.

2.13 There are advantages of using a full MRIO model, but they also require a significant amount of data from a variety of sources, which raises the level of uncertainty of the consumption‐based accounts which are calculated using this method. Several practical issues arise in the data manipulation phase for MRIO modelling and a number of assumptions must be made. These are discussed in more detail in Hertwich and Peters (2010), but in summary they are as follows:

• The trade interactions: Trade can be either uni‐directional, where the domestic country trades with all countries or multi‐directional where the domestic country trades with all countries and they trade between each other. Alternatively, imports could be assumed to be produced with the domestic production technology. This greatly reduces the data requirements, but may lead to large errors. • Regional groupings: it may be necessary to aggregate some regions for data handling purposes or to fill in missing IO data for some areas. • Trade flows to final demand and trade flows to industry data may not be available for all countries and therefore may have to be estimated. • Exchange rate variation: models could use either Purchasing Power Parity or Market Exchange Rates, but some method must be used to run the model in a common currency. • Inflation: the data for different countries is often available at different time periods, which means that adjustments must be made to the data to generate a base year. Methods such as the Consumer Prices Index are usually available in each country, but this can generate errors when applied on aggregate to sectors with different price changes and it can also vary depending on the base year and the method of indexing applied. • Product or industry classifications: the matrices which hold the industry and final demand data for countries can be classified by products or industries, with industry emissions data usually classified by industry and final demand by product. Additional matrices are therefore usually required to map between the two classifications. • Classification of IO data: this can vary between countries and the analysis requires mapping to a consistent classification system. • Data aggregation: it is beneficial to keep sectoral data at the highest detail available to reduce errors, but to generate consistency across countries some aggregation of data is usually required.

Page 167 • Valuation: IO data can come at different levels of valuation –basic, producer or purchasers (retail) prices. For consistency is it most appropriate to use the IO data in basic prices where possible, this often requires some translation of datasets from one form to another.

Generating a time series 2.14 The possibility of generating a consistent time series is limited by the data availability. For example, national symmetric input‐output tables or analytical tables may not be produced annually. GTAP data is usually published every 3 or 4 years, with data available for 1997, 2001 and 2004.The environmental data available, particularly in the larger global models may also be inconsistent across countries and years. Additionally, many of the data manipulation issues mentioned above are relevant when attempting to generate a consistent time series of data.

Methods for incorporating trade data – comparing models 2.15 Despite the level of data manipulation required and the complexity of the approach, a number of studies have employed global MRIO models or national accounting frameworks for EEIO to calculate emissions associated with domestic consumption for different countries and the first section of this document demonstrates that they can draw similar conclusions. In order to gauge the extent to which the limitations, assumptions and uncertainties influence the overall consumption‐based accounts it is useful to compare the results from different models and studies. SEI recently completed a comparison of consumption emissions for Sweden from three different EEIO studies, and found similar results across models11.

2.16 On a larger scale, Peters et al. (2011) have explored the possible modelling variations and uncertainties by comparing the results from two different calculation methods using a global 113 world region EEIO model, producing data for 95 countries. They compare a method called emissions embodied in trade (EEBT) (Peters 2008) with multi‐regional input‐output analysis (MRIO) for three years (1997, 2001 and 2004) and use trade data to construct a time series of consumption emissions for 95 countries between 1990 and 2008 named time series with trade (TSTRD). All three methods (TSTRD, EEBT and MRIO) calculate the emissions embedded in supply chains to produce consumed goods and services, but EEBT and MRIO are more accurate and cover either domestic supply chains (EEBT) or global supply chains (MRIO). They note that the uncertainty of their modelling does increase as the results become more disaggregated, but the TSTRD method is still stable for countries and sectors.

2.17 Peters et al. (2011) conclude that EEBT is more suitable for analysing bilateral trade and MRIO is more appropriate for studies at the sub‐national level or comparisons of final consumption between countries. Neither method is right or wrong, but they allocate emissions differently and can answer different questions. The EEBT method correlates directly with bilateral trade statistics (in proportion to domestic emission intensity) and the MRIO method correlates directly with final consumption (in proportion to global emission intensity).

2.18 In terms of application, the inclusion of the full supply chain in the MRIO method makes it more appropriate for disaggregation to localities, because the supply chain emissions are allocated to the final consumer and can therefore be applied to any level of consumption. Other methods like the

11 For further details please contact the author – Elena Dawkins: elena.dawkins@sei‐international.org

Page 168 EEBT may not be as suitable for disaggregation as MRIO, but their reduced complexity and more readily available data make them more appropriate for national time series analysis (Peters et al. 2011).

2.19 Whilst there can be variations in the models and data Wiedmann (2009) provides an overview of use of environmentally‐extended input‐output models across the world, highlighting that MRIO is a sound and relevant methodology for accounting for trade‐related impacts from a consumption perspective:

“The SKEP‐ERA network of funding institutions in Europe initiated two projects in 2008 aimed at identifying and describing a suitable methodology to assess trans‐national environmental impacts. The aim was to bring together existing knowledge and ongoing research on the assessment of global environmental impacts of traded goods and services, to review past and current accounting methodologies and to identify, specify and describe a suitable integrated approach. The project completed at the time of writing, EIPOT, came to the conclusion that multi‐region input–output (MRIO) analysis is a sound and relevant methodology for accounting for trade‐related impacts from a consumption perspective. Whilst MRIO cannot cover all policy and research questions in this area on its own, it forms a robust basis upon which more specific methods, using various forms of hybrid modelling, can be built (Wiedmann et al. 2009).”

In this paper Wiedmann (2009) also assesses the literature and studies on the uncertainty of MRIO analysis, highlighting the general uncertainties associated with input‐output modelling. He notes that both single region input‐output analysis and multi‐region input‐output analysis will generate uncertainty from their source (survey) data, imputation and balancing, allocation, assuming proportionality and homogeneity, aggregation, temporal discrepancies, model inputs, and multipliers. Still, in his further paper (Wiedmann et al. 2010) he emphasises that MRIO is emerging as a particularly comprehensive, versatile and compatible approach.

Overcoming Challenges

2.20 Some of the major methodological, data and computational challenges for producing EEIO models are mentioned above, but there are also more practical challenges such as costs, time commitments and timeliness of the publication of statistical data. The majority of the methodological and data challenges can or have been tackled across various research groups and published across the academic literature, with some studies exploring the levels of uncertainty in models and comparisons of the results from differing methods (see M Lenzen, Wood, and Wiedmann, 2010 and Peters et al. 2011).

2.21 Wiedmann et al. (2010) put forward a number of points for the requirements for MRIO development and research; better collection and access to environmental data; improved sectoral detail; limiting the data manipulations required to maintain the original data within models as far as possible; improving country coverage and the support of national and international statistical authorities and agencies who provide the input data. They note that whilst most of the major MRIO projects are supported through public funding and consequently made publically available there is

Page 169 further scope for producing more open source data and increasing transparency of data transformations and assumptions made within the models and the reproducibility of the methods. They also make suggestions for how to improve the infrastructure and implementation of MRIO research and how to deliver and use the results within policy making.

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

National perspective 3.1 Consumption‐based emissions accounting provides an alternative and complementary perspective to production‐based or territorial emissions accounts. It provides a different view of responsibility for emissions and can be useful to inform the policy debate on climate change mitigation. It is particularly relevant linking trade and climate policy due to its inclusion of imports; a valuable indicator for countries where emissions mitigation targets are met domestically, but consumption levels are maintained by importing emissions intensive goods from elsewhere. This becomes even more relevant for climate change policy if those goods are imported from countries without any binding targets for emissions reductions.

3.2 The MRIO method for consumption emissions accounting can be applied to any level of consumption because all supply chain emissions are allocated to the final consumer. This has the benefit of engaging individuals or communities in their personal contribution to emissions, and could be useful for mitigation efforts to change behaviours or practices domestically12. It can also demonstrate the different responsibilities for components of a carbon footprint; with the possibility to explore both the contribution of a producer or industry and the consumer (individually) or level of consumption (nationally).

3.3 There is a broad consensus in the academic literature that both production and consumption‐ based accounts are useful and relevant to climate change mitigation policy and decisions. Peters (2008) identifies the following benefits to generating a national consumption‐based emissions inventory:

• Eliminating carbon leakage through imports; • Covering more global emissions with limited participation; • Consistency between consumption and environmental impacts; • Increasing mitigation options and; • Making policies such as Clean Development Mechanism (CDM) a natural part of the inventory

3.4 There are also potential disadvantages of taking a solely consumption‐based approach to emissions accounting. Firstly, consumption accounts require more complex calculations and assumptions than production accounts, which increase the level of uncertainty. Secondly, it might result a loss of ownership and responsibility for production‐based emissions domestically. This wouldn’t be so much of a problem in countries where many of the goods produced domestically are consumed

12 See for example REAP Petite – a community footprint calculator: http://www.reap‐petite.com/

Page 170 domestically, as this would appear in their consumption accounts. However, in those countries where export levels are high and consumption‐based emissions remain comparatively small, the incentive to reduce emissions domestically might be lower than when they focus on reducing their production‐based emissions.

3.5 In a paper on production and consumption‐based emissions inventories Peters (2008) concludes that given the lower uncertainty, established reporting, consistency with political and environmental boundaries, and already wide‐spread use, it is likely that production‐based inventories will remain dominant. He then goes on to mention that consumption‐based inventories provide considerable insight into climate policy and mitigation. Experience of organisations such as SEI and others suggests that both consumption and production accounts should be maintained and published regularly as opposed to one or the other; especially as producer‐based emissions are required as an input to consumption‐based accounts, prior to the reallocation along supply chains and inclusion of imports. There are also methods to weight production‐based and consumption‐based inventories together, which as mentioned by Peters (2008) could be useful for building on the shared‐ responsibility for climate change mitigation literature.

Sector specific 3.6 Research of the Sustainable Consumption Institute at the University of Manchester highlights the importance of incorporating both consumption and production‐based accounts when considering emissions from agriculture and the food system (Roeder et al. 2011). With increasing climate change impacts, agricultural production in some world regions is likely to be favoured while others might be significantly disadvantaged. This will be particularly challenging in regions with a high rise in demand for food and where production is projected to be limited by increasing temperatures. This may result in a greater number of countries relying on a few main producers.

3.7 With this in mind, producers in the less severely affected regions will need to maximise their yields and land‐use efficiency to maintain global food supply. To facilitate this, a higher use of agrochemicals, particularly nitrogenous fertilisers is likely to be necessary. This will in turn increase the greenhouse gas burden associated with increased nitrogen fertiliser production and usage, resulting in substantial increases in the national emissions inventory in key producer countries under the existing accounting framework. This could be a disincentive to increase production in these countries and as a result counterproductive to improving global food security and poverty reduction. Using both a consumption and production‐based approach would help to classify the source and end‐user of emissions and allow production for export in favourable regions without penalising them for increasing their emission to support global food consumption.

3.8 With particular reference to the international transport sectors, under the producer‐based greenhouse gas emissions accounting, international shipping (and aviation) emissions are currently excluded, as the majority of emissions are released in international waters (and airspace). Nonetheless, the amount of bunker fuel sold by a nation is reported to the UNFCCC by Annex 1 nations as a memo item. This current method of reporting was described by the Environmental Audit Committee as being inadequate to represent the UK’s actual share of international shipping emissions (EAC, 2009). By taking a consumption‐based approach, the emissions released from international shipping (and aviation) would be automatically included in the emission accounts. The

Page 171 international shipping (and aviation) emissions would then constitute part of the embedded emissions that are released along the goods or services supply chain.

3.9 In the absence of a global agreement to control the release of greenhouse gas emissions from international shipping or aviation, the consumption‐based approach would place responsibility on the consumer to monitor and mitigate its share of shipping emissions over time (Gilbert et al, 2010). It should be noted however, that shipping is not well represented in existing MRIO‐related databases, and this would need to be addressed.

3.10 To report international shipping emissions under a consumption‐based approach would require a clearly defined methodology. The main practicality issue is devising the methodology to apportion the emissions released on a shipping journey between the different consumer’s goods or services that are being shipped. This would be most problematic for containerised vessels and vessels that call at multiple ports. However, if the shipping journey was to facilitate the movement of a single good or service, such as coal, then the emissions of that journey would be reported as part of its embedded supply chain emissions.

3.11 Given the island‐nature of the UK and increasing demand for consumer goods produced in geographically disparate regions, the use of consumption‐based reporting approach could increase the UK’s share of international shipping emissions from an estimated 7 MtCO2 to 42 MtCO2 (Gilbert et al, 2010). These numbers assume that the current reporting approach is the amount of bunker fuel sold by the UK and the consumption‐based estimate involves a top‐down emissions accounting approach based on the total goods imported into the UK.

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

4.1 This is outside our sphere of research.

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

(a) Desirable:

5.1 The desirable effects would be the UK taking more responsibility globally for the emissions that are generated to support growing levels of domestic consumption. This would increase the share of global emissions over which the UK has influence, and therefore broaden its reach over the climate outcome of an increase in emissions (Bows and Barrett, 2010).

5.2 It could give priority to both decarbonising industry domestically and the avoidance of carbon emissions generated in the supply of goods and services being transferred abroad. It would bring together climate policy and trade, which would tackle the common critique of production‐based accounting for not including the emissions associated with imported goods. Under only

Page 172 production‐based targets, the consumption of imports and their associated embedded emissions can continue to increase without any monitoring, but a consumption‐based target would include these emissions.

5.3 The consumption approach can demonstrate the role that consumption plays in counteracting emissions mitigation efforts, if growing consumption outweighs the efficiency improvements domestically or from imports then this would be evident from the consumption‐based accounts. Consumption‐based accounts can be used alongside other indicators to consider alternative mitigation options with a more global focus, along with a new perspective for sharing of climate change mitigation commitments and responsibilities across the world.

(b) Practicable:

5.4 This can be separated into two parts; whether it is practical to generate the accounts in a consistent manner appropriate for measuring against targets and whether it would be practical or possible to meet any targets set on a consumption basis.

5.5 The sections above detail the methods available for generating the accounts and whether this would be considered a robust method for targeting is dependent to some extent on the method chosen and the data and financial provision for generating and maintaining consumption‐based accounts. Nationally, work would need to be done to collect and publish the necessary datasets more frequently in order to produce timely and robust consumption‐based emissions estimates for regular accounting and monitoring. It may not be possible to use a full MRIO approach for measuring against targets as it is reliant on global trade data and models, which are not produced annually due to their data intensive production process. Alternative methods such as emissions embodied in trade (see Peters, 2008) or time series with trade (see Peters et al., 2011) could be used to generate annual consumption‐based accounts, but this is also likely to require additional work to publish the necessary input datasets more regularly. As Peters, 2008 notes, MRIO is most useful for product or consumption specific studies and a method such as emissions embodied in trade would be more useful for national emissions inventories limited to bilateral trade flows. Solely consumption‐based national emissions inventories would suffer from higher complexity and uncertainty and lower transparency than production‐based accounts.

5.4 In terms of meeting targets the UK would not have political jurisdiction over all the regions that contribute to its emissions targets in a consumption‐based account, as the accounts would include emissions occurring during the production of imported goods and services anywhere in the world. Targets would have to take trade into consideration and in order to meet any targets it may be necessary to take measures to either reduce consumption from certain emission‐intensive countries or to help deliver and encourage emissions reductions within those countries. The political economy of climate mitigation may shift to reflect the new accounting approach, but practically, due to the global nature of supply chains and the aggregate nature of the models and accounts, it may be difficult to identify specific countries, or industries within those countries, to target for mitigation efforts. In addition, the time lag between the publication of underlying data and the publication of

Page 173 consumption‐based accounts would also make monitoring the account against national targets more difficult.

5.5 Peters (2008) notes that a number of authors have argued that production‐based and consumption‐based inventories represent two extremes and it would be beneficial to generate a method for shared‐responsibility. A number of proposals such as Greenhouse Development Rights framework, Baer et al. (2008)13 advocate a type of shared responsibility for mitigation between consumers and producers and Peters (2008) extends the shared responsibility concept specifically to production‐based and consumption‐based national emissions inventories.

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 If the UK were to adopt consumption‐based accounting alongside production‐based accounting then this would demonstrate internationally that the UK is taking into account the emissions impacts arising from trade. If the model used to calculate the consumption‐based emissions can provide the necessary detail then it could also be used to identify potential carbon leakage from countries with binding targets to those without, demonstrating the UK’s understanding of the importance of making progress towards emissions reductions on a global scale.

6.2 If the UK adopted a solely consumption‐based approach to emissions accounting then the UK would have to work closely with other countries to encourage mitigation efforts abroad to reduce the impact of any imported goods to the UK. However, if successful, it would gain greater influence over future climate impacts than is currently the case.

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

7.1 Consumption‐type approaches can also take a more bottom‐up perspective and consider the life‐ cycle emissions of products consumed. In the example below, the consumption of beef is used to highlight how current production‐based emission inventories may significantly underestimate the full greenhouse gas impact of beef consumption.

7.2 The 2008 UK emission inventory report estimates that 353.33 Gg of methane are released by the non‐dairy cattle herd through enteric fermentation (McCarthy et al. 2010). To illustrate how even just the direct component of emissions (ie excluding emissions associated with feed for cattle) would change if applying a consumption‐type framework, a simple method from Walsh et al. (2009) can be used. Within this method, the methane embodied in traded beef commodities is required. This can be estimated by considering the direct enteric fermentation emissions throughout each cow’s lifetime associated with the total amount of meat product traded. Including the imports of traded

beef, but excluding exports leads to a national consumption‐based estimate of 437.32 Gg CH4, ‐ an increase of 24% compared with the existing production‐based emission. This is particularly

13 http://www.sei‐us.org/projects/id/124 and http://gdrights.org/

Page 174 significant given methane’s global warming potential of 25, effectively increasing the production‐

based estimate by over 2099 Gg CO2 eq. (Conor Walsh).

October 2011

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Page 176 Peters, Glen P., Jan C. Minx, Christopher L. Weber, and Ottmar Edenhofer. 2011. “Growth in emission transfers via international trade from 1990 to 2008.” Proceedings of the National Academy of Sciences 108 (21) (May 24): 8903 ‐8908. doi:10.1073/pnas.1006388108.

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Wiedmann, Thomas, Harry C. Wilting, Manfred Lenzen, Stephan Lutter, and Viveka Palm. 2010. “Quo Vadis MRIO? Methodological, data and institutional requirements for multi‐region input‐output analysis.” Ecological Economics In Press, Corrected Proof. doi:16/j.ecolecon.2011.06.014. http://www.sciencedirect.com/science/article/pii/S0921800911002606.

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Page 177 Memorandum submitted by InterfaceFLOR (CON 29)

I would like to congratulate DECC on this inquiry and offer my thoughts as the sustainability director of InterfaceFLOR, a carpet company that has been measuring embodied impacts for a number of years and we have seen a tremendous value in doing it.

Without further words, let me express the main points we have learned and some thoughts of how this could apply to a country such as the UK.

• Consumption‐based emissions reporting should not be done for the sake of it (as an accounting exercise). It should aim at re‐designing the flow of imported goods and systems to radically reduce the overall emissions created by a country’s consumption.

• The key leverage is that many products are designed in the west and manufactured in Asia. Decisions at product design level by a UK product manager could cut dramatically the emissions of making that product in Asia, reducing the imported emissions of the UK (and most importantly, the rest of the world). That design would immediately become a key service that the UK could export. Unfortunately I don’t see much policy thinking on this critical area.

• Re‐designing products is the most effective way of reducing the emissions from the increasingly export‐oriented Asian economies. (easier and quicker than subsidising these developing economies to go for renewables).

• For our products, carpet tiles, around 70% of the total carbon footprint is on the raw materials. Only 10% is production and the rest is transport, end of life and vacuum cleaning. We have been focusing on the last years to reduce our ‘imported embodied’ impacts of the raw materials that we use to make our products.

• InterfaceFLOR's latest product, Biosfera Micro, made with 350g of 100% recycled yarn, was redesigned to half the carbon footprint of a normal carpet tile. Embodied carbon reductions are easier to achieve than own direct emissions. See more at http://www.interfaceflor.co.uk/web/sustainability/gobeyond

• So the key leverage of a product importer, service exporter country like the UK is not in reducing home emissions. It's in using its people's brains (their service industry) to reduce the impacts for goods produced in other countries. It's about coming out with innovations that will substitute high energy intensive materials. Countries that will invest in these technological breakthroughs will get a competitive advantage. Whoever comes with a substitute for steel or cement will have a huge advantage, either company or country.

• Measuring embodied impacts of products will enable consumption based taxes rather than inputs based taxes such us national or European carbon trading or carbon floor prices. The issue of carbon leakage could also be addressed much easier by taxing finished goods based on their embodied carbon. (since it doesn’t matter where the goods are produced, goods produced internally or imported would face the same tax). That would be the final nail on the coffin for carbon leakage.

• That would mean taxing physical things based on embodied carbon and taxing energy hungry machines based on their carbon emitted at use level. Taxing things at consumption / product level can be easier than the complex carbon trading mechanisms. It could also enabling tax

Page 178 discounts for products with super‐low carbon impacts, if at some point governments are brave enough to consider things such as reduced VAT.

• It's rather pointless that governments (eg DEFRA’s clumsy attempts) and retailers embark in doing LCAs for all the products that pass through them. Governments should ask companies to produce LCAs for the products they put on their markets and Retailers such as supermarkets should ask for their suppliers. At the end of the day, the core knowledge is with the producer. And the key to redesign a product to radically have less embodied impact is with the producer.

• It’s actually neither that complex nor expensive to produce LCAs / EPDs for products. Starting from zero could be £10‐15k. In our company we have the competence in‐house and it costs us much less.

• Transparency of embodied impacts (using magic metrics such as gCO2/kg of material or gCO2/m2) could enable transformative regulation at all leves with a changing power equal to what gCO2/km did for the car industry. See magic metric article attached.

• Rather that supporting ailing high‐energy intensive industries, government industrial policy should encourage radical alternatives to those energy intensive materials. IP in these areas could be a critical source of growth in the countries of invention.

• We should move away from the rather constraining scope 1,2,3 thinking. We should just shift mindsets from direct company and country footprints to product footprints.

I hope these thoughts are useful. Again let me congratulate you for this initiative.

If you need evidence of LCA of our products to show the transformative power of focusing on reducing embodied impacts, please do not hesitate in contacting me.

October 2011

Page 179 Memorandum submitted by Aldersgate Group (CON 30)

The Energy and Climate Change (ECC) Committee is launching an inquiry to investigate the case for consumption-based greenhouse gas (GHG) emissions reporting in the UK. The Committee has invited responses addressing some or all of the following questions:

• How do assessments of the UK’s GHG 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 GHG 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 GHG emissions accounting? • Are there any other issues relating to consumption-based emissions reporting that you think the Committee should be aware of?

Aldersgate Group (AG)

The AG is an alliance of leaders from business, politics and society that drives action for a sustainable economy. The views expressed in this document can only be attributed to the AG and not individual members. The AG held a roundtable in October 2011 with business representatives to help inform our response to this inquiry.

Summary

Assessment and Methodologies

• A number of studies demonstrate that the UK’s consumption emissions are significantly higher than its production emissions and this gap is likely to grow considerably. • Potentially, the UK could import as much carbon as it produces by 2025. • The lack of confidence in the data gathered for consumption-based emissions reporting (CBER) from some external sources is a major cause for concern.

Benefits and Disadvantages

• The AG believes that more transparency for the UK’s full carbon footprint is required for a system of domestic carbon budgets effectively to address an international challenge such as climate change. • The UK should be a pioneer in CBER – in line with the UK’s aspiration to be an international leader in addressing climate change. • The AG believes it is too early to mandate scope 3 reporting at either a national or business level. However, it should be strongly encouraged to help drive good decision making with better and more sustainable outcomes. • A roadmap for scope 3 emissions reporting should be as follows: 1. Start measuring it, engage suppliers and identify “hot spots”

Page 180 2. Use it to make better procurement decisions 3. Use it to improve performance and/or implement better policy 4. Ultimately report metrics, targets, actions and achievements.

International Implications

• A consumption-based approach would put greater responsibility on an increasingly service-based economy such as the UK to help developing countries reduce their GHG emissions. It would also emphasise the importance of securing a just international climate change treaty. • A further implication is that international targets for carbon emission reductions would have to be renegotiated.

Carbon Leakage

• To date, there is no evidence of industry relocating from the UK solely as a result of climate change policy. • While, in a limited number of industries, carbon costs can be significant and must be addressed by policy makers, often they are exaggerated and the potential economic benefits ignored. • When most businesses decide on a production location, environmental costs tend to be low relative to considerations of the cost of capital, fiscal regime, wage costs, workforce skills, exchange rate fluctuations, infrastructure and proximity to the market. • The Committee on Climate Change should investigate issues and methodologies relating to CBER in their upcoming inquiry into carbon leakage.

Business Implications

• Similarly to national reporting, the AG believes that there should be greater focus on lifecycle reporting at the corporate level. • Full lifecycle analysis in targeted sectors will allow policy makers and consumers to focus on a “magic metric” - a metric associated with the biggest impact across the full value chain. This single piece of data would help to galvanise legislation to create a level playing field that promotes strong competition and innovation to redesign products to reduce their environmental footprint. • This would lead to more informed decisions, help to eliminate greenwash and should be used to shape legislation. • For example, carbon transparency in the automotive sector is measured on a product basis (which focuses on tailpipe emissions, where there is the greatest carbon impact) rather than at the company level (operations and manufacturing). • CBER should not be undertaken solely as an accounting exercise but seek to drive transformative change.

Page 181 AG Response

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

1. The UK formally reports its GHG emission and carbon budgets on a production basis, as consistent with the Intergovernmental Panel on Climate Change (IPCC). It does not take into account the emissions that are generated through the consumption of goods and services that have been imported from overseas. On the other hand, it does take into account the emissions from goods and services that are produced domestically but exported elsewhere.

2. A number of studies demonstrate that the UK’s consumption emissions are significantly higher than its production emissions. If carbon emissions are calculated on the basis of consumption rather than production (allowing and adjusted for carbon intensive imports and international travel), the UK’s performance on carbon emissions between 1990 and 2005 is transformed from a 19 percent reduction to a 15 percent increase1. Research by the Carnegie Institute of Washington in California finds that 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 Japan2.

3. What is more, it is highly likely that a growing proportion of the UK’s carbon footprint will be imported from oversees as production emissions fall due to domestic climate change policies. Research by the Carbon Trust demonstrates that in 1992, the UK imported an additional net 7% emissions embodied in trade; by 2004, this had grown to 34%. Net UK imports of emissions are projected to continue to grow to 73 – 96% of production emissions by 2025, the range depending on the carbon intensity of production in other countries, and the anticipated reduction in the UK’s production emissions from 2004 to 2025. This will result in the UK potentially importing as much carbon as it produces at home by around 2025, making imported carbon a significant issue3

1 Dieter Helm, Jonathon Phillips and Robin Smale (2007) Too good to be true? The UK’s climate change record. 2 Carnegie Institute of Washington (March 2010). Reported in the Guardian: UK import emissions are the highest in Europe, figures show (8th March 2010). 3 http://www.carbontrust.co.uk/policy-legislation/international-carbon-flows/global-flows/pages/uk.aspx#7

Page 182

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?

4. The lack of confidence in the data gathered for CBER from some external sources is a major cause for caution. GHG emissions generated within the UK are measured by recognised methods, but imported emissions are derived using less robust methods; for example the Global Trade Analysis Project (GTAP) Database data is provided by academics and trade associations on a voluntary basis and is based on a number of approximations.

5. Defra has commissioned research, updated in May 2011, that provides analysis of where GHG emissions associated with UK consumption occur by both sector and country. This traces the embedded GHG emissions of 57 product groups for 2004 across 113 countries and 57 sectors4. While this is helpful to inform cost effective climate change mitigation actions and policy development, the data is not sufficiently robust to measure accurately and set targets at this stage.

6. The data analysed for the Defra report is high level: UK exports are excluded, imports and supply chain data taken into account but only by raw products (such as iron, steel, rice, etc). Consumer products (such as a washing machine or hairdryer) are not broken down into their individual components, as this would require lifecycle analysis for each and every product. This level of complexity would be a major barrier to the adoption of full CBER.

7. The Defra report also notes, that “there are a number of uncertainties associated to the GTAP database and to the construction of MRIO models in general. These are related to a number of issues, like manipulation due to calibration, balancing and harmonisation,

4 Sustainability Research Institute, University of Leeds (May 2011) UK Consumption Emissions by Sector and Origin.

Page 183 use of different time periods, currencies, country classifications and levels of disaggregation, inflation, data errors, among others.”5

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

8. To date, there is no evidence of industry relocating from the UK solely as a result of climate policy. The Government is committed to ensuring that energy intensive industries remain competitive and ensuring that it sends a clear message that the UK is open for business. Before the end of the year, it will announce a package of measures for the energy intensive businesses whose international competitiveness is most affected by our energy and climate change policies. This is in response to a number of competitive concerns that have been raised from energy intensive industries, such as the potential risk of carbon leakage.

9. While, in a limited number of industries, these costs can be significant and must be addressed, often they are exaggerated and the potential economic benefits ignored. For example, analysis by the Carbon Trust is the “nail in the coffin for the myth that the EU ETS presents a threat to overall business competitiveness”, as it finds that carbon costs remain trivial compared to other influences on international competitiveness for more than 90% of UK manufacturing activities6. When businesses decide on a production location, environmental costs tend to be low relative to considerations of the cost of capital, fiscal regime, wage costs, workforce skills, exchange rate fluctuations, infrastructure and proximity to the market. Another Carbon Trust study finds that low carbon manufacturing would be severely weakened if all sectors currently deemed at risk of carbon leakage by the European Commission received free allocation of permits7.

10. Climate legislation should be globally consistent to counter the risk of carbon leakage, or a “carbon shift”. It is evident that the point of production of iron and steel has shifted considerably to developing countries but this has been mainly due to a response to demand shift and cheaper labour.

11. For example, China produces 626m tonnes of steel per year, compared to the UK’s 9.7m8, so production-based targets in the UK or EU ETS can have little impact on the global emissions of the steel sector. While there are a number of challenges to country averages for CBER (such as the disparity of the carbon footprint of steel manufactured from an electric arc furnace or integrated by refining iron ore), more transparency would help to highlight some interesting issues such as the carbon benefits of local recycling.

12. It is welcome that the Committee on Climate Change is launching an inquiry into carbon leakage and competitiveness that is due to report by March 2012. As part of this inquiry, the Committee should investigate issues relating to CBER and examine appropriate methodologies that the UK should adopt.

What are the benefits and disadvantages associated with taking a consumption-based rather than production-based approach to GHG emissions accounting? Would it be

5 Ibid. 6 Carbon Trust (January 2008) Press Release: EU ETS to have marginal impact on competitiveness of EU industry. 7 Carbon Trust (March 2010) Tackling carbon leakage: Sector-specific solutions for a world of unequal carbon prices. 8 EEF (2011) Key Statistics, p14. http://www.eef.org.uk/eef1/handlers/resource.ashx?http://www.eef.org.uk/NR/rdonlyres/C2F00A49-B277-4015- 9EEB-74E3051721D0/19061/KeyStatistics2012.pdf.

Page 184 (a) desirable and (b) practicable for the UK to adopt emissions reduction targets on a consumption rather than production basis?

13. The AG believes that more transparency about the UK’s full carbon footprint is required for a system of domestic carbon budgets to address an international challenge such as climate change effectively. As such, much greater focus needs to be placed on interventions that prompt awareness and action along the supply chain.

14. While moving towards CBER is a laudable goal, it should complement rather than replace production based reporting (even were the data to become more robust). Defra’s work in this area provides valuable analysis of carbon emissions from an alternative perspective but should not be used as stand-alone data. AG members are generally of the view that CBER data will be sufficiently robust in 10 – 15 years time and the UK would be well placed to be a pioneer – in line with the UK’s aspiration to be an international leader in addressing climate change.

15. The AG believes it is too early to mandate scope 3 reporting at either a national or business level. However, it should be strongly encouraged to help drive good decision making with better and more sustainable outcomes.

A roadmap for scope 3 emissions reporting should be as follows:

1. Start measuring it, engage suppliers and identify “hot spots” 2. Use it to make better procurement decisions 3. Use it to improve performance and/or implement better policy 4. Ultimately report metrics, targets, actions and achievements

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

16. A consumption-based approach would put greater responsibility on an increasingly service-based economy such as the UK to help developing countries reduce their GHG emissions. It also emphasises the importance of securing a just international climate change treaty. A further implication is that international targets for carbon emission reductions would have to be renegotiated.

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

17. While this inquiry is focused on national reporting, the adoption of CBER would have significant implications for businesses. Much like national reporting, companies can report approximations using economic input / output models, or more accurately using lifecycle assessments (which is much more resource intensive to undertake).

18. The Defra carbon reporting guidance for large organisations defines scope 3 emissions as those “that are a consequence of your actions, which occur at sources which you do not own or control and which are not classed as scope 2 emissions. Examples of scope 3 emissions are business travel by means not owned or controlled by your organisation, waste disposal, or purchased materials or fuels.”9

19. While the guidance states that reporting scopes 1 and 2 emissions is “recommended”, it suggests that reporting scope 3 emissions is “discretionary”. It states that “for some organisations, emissions within scope 3 may be the largest proportion of total emissions.

9 Defra (September 2009) Guidance on how to measure and report your GHG emissions

Page 185 By calculating your scope 3 emissions, you will get a more complete understanding of your organisation’s total impact on climate change. Identifying your organisation’s scope 3 emissions will also help increase your awareness of where your organisation sits within the supply chain and enable you to engage with other organisations in the supply chain. However it is acknowledged that it can be difficult to measure and calculate your scope 3 emissions so it is recommended you focus on your ‘significant’ scope 3 emissions.”

20. Just as with national reporting, the AG believes that there should be greater focus on lifecycle reporting at the corporate level. For certain businesses, such as those with narrower procurement ranges and operational control of key points in the value chain, this could improve transparency and focus attention towards the greatest impacts rather than solely direct emissions (scopes 1 and 2).

21. A typical product contains a large number of components and materials that are sourced from different locations. There are environmental impacts at each stage of the supply chain, including manufacture, use and disposal. Lifecycle assessment (LCA) to a defined international standard (such as ISO14040 and ISO14044) helps to assess environmental impacts associated with all the stages of a product's life and helps to avoid a narrow outlook.

22. According to the European Commission, ““the key aim of Life Cycle Thinking is to avoid ‘burden shifting’. This means minimising impacts at one stage of the lifecycle, or in a geographic region, or in a particular impact category, while helping to avoid increases elsewhere. For example, saving energy during the use phase of a product, while not increasing the amount of material needed to provide it.”10

23. There are some immediate business benefits associated with LCA. For example, according to the Government’s Business Link website:

“If you are serious about reducing the environmental impact of your business, it's essential that you work in close partnership with your suppliers to ensure that they maintain their own high environmental standards. As a supplier, you should also help your customers to meet their environmental targets.11

There can be significant cost benefits from being environmentally aware. Reducing energy consumption, raw materials, waste production and waste disposal can all have a major impact on the profit your business makes. By working together with other organisations in your supply chain you can help to ensure that you each operate efficiently and keep your impact on the environment to a minimum.”12

24. More fundamentally, a shift to full transparency of sustainability performance on a product basis in targeted sectors will allow policy makers and consumers to differentiate products and services in terms of the highest impacts, allowing for more informed decisions and helping to shape behaviour. In many sectors, there should be a focus on a “magic metric” - a metric associated with the biggest impact across the full value chain. This single piece of data would help to galvanise legislation to create a level playing field that promotes strong competition and innovation to redesign products to reduce their environmental footprint. This would help to drive cost-effective emissions reductions and help to eliminate greenwash by reducing the ability of companies to cherry pick the most

10 http://lct.jrc.ec.europa.eu/

12http://www.businesslink.gov.uk/bdotg/action/layer?r.i=1079442450&r.l1=1079068363&r.l2=1086021866&r.l3=1 079438684&r.t=RESOURCES&topicId=1082899564

Page 186 flattering data. Good quality reporting at a product level also allows legislation to be introduced, which could drive the process more effectively than customer engagement.

25. For example, one of the most significant areas of progress in terms of UK carbon abatement is energy efficiency of cars. New car emissions were 144 gCO2/km in 2010, compared to an indicator of 156 gCO2/km and a 2020 indicator (and EU target) of 95 gCO2/km13. In this sector, carbon transparency is measured on a product basis (which focuses on tailpipe emissions,- the “magic metric”) rather than at the company level (operations and manufacturing). This allows for market frameworks and regulation to be more effective (such as the EU regulation, company tax bands and congestion charging) and ensures greater transparency for consumers who can differentiate between different cars on carbon performance and associated running costs.

26. The following lessons can be learned from this example14:

• Develop a common metric based on the full life cycle impact of a product – or at least on its biggest impact. • Adopt a top-down visionary approach at European level for the performance required in a few years time (or federal level if in the US). • Regulate to ensure the metric is displayed on all promotional materials. • Make sure the metric is visible to consumers at point of sale. • Use national taxes and regulations to reinforce changes brought about by the metric. • Enable local and city legislation and taxes to reward products with the lowest footprint. • Encourage companies and public purchasers to make decisions that promote products with smaller footprints.

27. Full product transparency will not be suitable for all products and sectors due to complexity and costs (for example, it would not be feasible for a supermarket to undertake LCAs for all their products). However, more progress should be made in targeted sectors such as energy generation (with labels demonstrating carbon content), transport (including emissions per passenger per km in aviation industry), commercial buildings (Display Energy Certificates) and the services sector (such as banks and law firms).

28. While product footprints are vital in helping a business understand the environmental impacts of its supply chain, it can be complex to make comparisons between competitors across a whole product. While there can be issues surrounding accuracy and a high margin of error regarding assumptions, reporting of scope 3 emissions should be strongly encouraged. Product category rules, such as those drawn up by Defra, can be used to help make informed assumptions, while an industry body can ensure continuity in how those assumptions are made. Fundamentally, a business’s goal should be to establish a benchmark and assess performance against it, rather than trying to calculate the minutiae.

29. While CBER is important to demonstrate quantitatively climate change impacts, it should not be undertaken solely as an accounting excise that does not help to drive change. CBER should primarily aim to reduce overall GHG emissions radically by re-designing products and systems or helping drive customer demand for lower emission goods and services. The key leverage is that many products are designed in the West and manufactured by developing countries. Decisions at product design level by a UK

13 Committee on Climate Change (June 2011) Progress Report. 14 InterfaceFlor (November 2011) Transparency in Action: The power of the magic metric

Page 187 product manager could dramatically cut imported GHG emissions (and more importantly, the rest of the world). That design would immediately become a key service that the UK could develop expertise, export and drive competitive advantage by investing in technological breakthroughs.

October 2011

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