Consumption-Based Emissions Reporting - Energy and Climate Change Contents

2  Considering consumption-based emissions

6.  The Committee received evidence that DECC's position of relying solely on one method of calculating emissions—the territorial approach—had severe shortcomings in terms of UK energy and climate change policy. WWF-UK's Head of Climate Change, Dr Keith Allott, argued that consideration of consumption-based emissions alongside the established territorial approach "gives additional insights, guards against perverse consequences, and can help to improve policy formulation".[10] Academics from the universities of Leeds, Manchester and York all agreed that there was a case for publishing consumption and territorial emissions together.[11]

7.  This view was shared amongst representatives of energy-intensive industries and businesses. The Director of UK Steel, Ian Rodgers, told us that "[the territorial approach alone] gives a false view of the UK's total contribution to climate change". [12] Jeremy Nicholson—Director of the Energy Intensive Users Group (EIUG), Fergus McReynolds—Senior Climate and Policy Adviser at EEF (the manufacturers' organisation), and Dr Richard Leese of the Minerals Products Association all agreed that relying solely on territorial emissions provided an "incomplete picture".[13] The EIUG's Jeremy Nicholson added that this picture was "an inaccurate one, which is unhelpful for policy makers and indeed for the industry".[14]

8.  The Carbon Trust had undertaken detailed analysis of the UK's consumption-based greenhouse gas emissions. Their Associate Director, Eric Lounsbury, explained to the Committee the problem with DECC's reliance on territorial emissions as an indicator of the success of the UK's climate policies:

If we have tackled one half of the problem, which is producing the stuff that we produce here more carbon-efficiently, that is a huge part of the battle, but we should not forget about the other piece of it [that we are also consuming more goods and services causing emission outside the UK].[15]

9.  The UK's consumption-based emissions are published by Defra, and take into account the emissions embedded in the UK's imports and exports.[16] Defra's Parliamentary Under-Secretary of State—Lord Taylor of Holbeach CBE—told us that, "Taken together, territorial and consumption emissions provide a more complete picture of the carbon emissions associated with the activities of UK citizens and businesses." [17]

Emissions trends

10.  Analysis by the Sustainable Consumption Institute has shown that UK greenhouse gas emissions measured on a consumption basis are consistently higher than those on a territorial basis, and the gap is widening as shown in Figure 1.[18] This research was funded by Defra, and is being continued on at Leeds University for years 2009-2014. The UK Energy Research Centre (UKERC) stated that while territorial-based emissions showed a 19% reduction between 1990 and 2008, consumption based emissions showed a 20% increase.[19]

11.  Analysis by the Carbon Trust has shown that in 2004 the UK's consumption emissions were 34% greater than the "usually reported" territorial emissions, as shown in Figure 2.[20] Given this disparity, WWF-UK thought that it was not "credible for the UK to claim progress towards a sustainable, green economy" unless the impacts of both UK territorial and consumption emissions were addressed together.[21]

Figure 1—Comparison of UK consumption-based GHG emissions with territorial emissions[22]

Source: UK Energy Research Centre (UKERC)

12.  Oxford University's Professor of Energy Policy, Dieter Helm, and others examined the UK's climate record up to 2007, in the report, "Too Good to be true?".[23] They determined that one of the main reasons for the UK's territorial emissions falling was the "dash-for-gas" since 1990.[24] Helm's report noted that these emissions savings were "real" in that they were a genuine GHG reduction caused by the displacement of coal-fired electricity generation by gas.[25] WWF-UK's Dr Keith Allot agreed that the UK's move from coal to increasing amounts of power generated by gas had played a part in driving down the UK's territorial emissions, but noted that this transition "was not really driven by climate change policy".[26]

Figure 2—the impact of a consumption-based view on emissions by country.[27]

Source: The Carbon Trust

13.  The UK Energy Research Centre (UKERC) observed that the difference in the UK between the rate at which consumption-based emissions rose and the rate at which territorial emissions fell was the largest amongst the top ten emitters in the world—a 23% difference in 2008 compared to 1990, compared to only 8% for the US (see Figure 3).[28] Figure 3 shows that consumption emissions in the USA and UK since 1990 have grown faster than their territorial emissions have fallen. This is because the UK and USA, and by 2006 Canada, were increasingly consuming more emissions embedded in imports than they were reducing their territorial emissions. Meanwhile, China and India were increasingly exporting more of their emissions to be consumed in other countries.

Figure 3—Growth difference between consumption-based and territorial-based CO2 emissions from 1990 for China, India, and industrial nationals in the top ten emitters.[29]

Source: UK Energy Research Centre (UKERC)

14.  When we raised this with Ministers, the DECC Minister Greg Barker told us, "If we were to see a divergence [between territorial and consumption emissions] obviously we want to take that into account" [30]

15.  There is a clear divergence between the UK's territorial emissions and its consumption-based emissions. Furthermore, the rate at which the UK's territorial emissions have fallen has been outpaced by the growth in its consumption-emissions. We are concerned that the UK could be meeting its domestic carbon budgets at the expense of the global carbon budget.

Carbon Leakage

16.  As the UK's industrial emissions fell, the growth in the UK's consumption emissions indicated either that industry (and therefore the associated emissions) was leaving the UK, or that the UK was consuming more and more (or a combination of the two). The term carbon leakage is used to refer to the relocation of an industry to avoid the costs of cutting greenhouse gas emissions that have been imposed in a particular region (for example, the EU-Emissions Trading System). In the new region, the industry continues to emit greenhouse gases without any penalty, and exports their products back into the original region to be "consumed". Carbon is said to be "embedded" in these products. Carbon leakage can also refer to the associated "investment leakage", where companies do not invest in a country in the first place owing to the carbon costs that are imposed.

17.  Ultimately, carbon leakage leads to an increase in the amount of greenhouse gases that are emitted to the atmosphere, despite efforts to reduce them. UKERC defined two distinct categories of carbon leakage: weak and strong:

  • strong carbon leakage refers to an increase in global emissions owing specifically to climate policies; while
  • weak carbon leakage refers to an increase in global emissions owing to increased consumption, rather than any specific government policy.[31]

18.  However, there can be many reasons why a business may choose to relocate to another country, or invest money in one region over another. The Aldersgate Group (a coalition of environment agencies, NGOs, think tanks and industry) noted that "there is no evidence of industry relocating from the UK solely as a result of climate change policy", in other words, no evidence of what UKERC described as "strong carbon leakage".[32] The Public Interest Research Centre's Guy Shrubsole told us that the disparity between UK consumption and territorial emissions "is almost entirely down, so far, to weak carbon leakage—that is increasing consumption". [33]

19.  The Aldersgate Group explained that, while carbon costs could be significant for a limited number of industries, "often they are exaggerated and the potential economic benefits [of reducing emissions] ignored".32 UKERC argued that the current carbon price is too low to be a factor in a company's decision on where it manufactures its goods.[34]WWF-UK believed claims that business is being driven overseas by carbon regulation (including by the EU-ETS) had been shown to be "greatly exaggerated or even groundless" although it was sometimes cited by industry as the reason for their relocation.[35] For example, Rio Tinto blamed the closure of their Alcan aluminium smelter in Northumberland on "energy costs [that] are increasing significantly, due largely to emerging [climate] legislation".[36] In contrast, WWF-UK believed that the "dynamics of globalisation" were the main driver of where companies located their manufacturing facilities, rather than "environmental, climate or social policies implemented in the UK".[37]

20.  Professor Dieter Helm explained that the "de-industrialisation" (a move away from manufacturing industries) that the UK has experienced since 1990—which would have contributed to a fall in territorial emissions—"may have not delivered a real saving at the global level" as it led to increased emissions from countries with greater greenhouse gas intensities in their manufacturing sectors.[38] The University of Leeds' Professor Barrett argued that greater emphasis on a system of consumption-based accounting could have the positive effect of highlighting the efficiency of UK industry in terms of lower emissions intensity.[39]

21.  The Director of UK Steel, Ian Rodgers, explained that the drive to decarbonise the power-generating sector had led to higher electricity prices in Europe.[40] However, Mr Rodgers added that the steel sector had "free [emissions] allowances under the EU-ETS. So it would be implausible to argue that current policies […] resulted in [strong] carbon leakage".[41] The Minerals Products Association's Dr Richard Lease added that the UK's climate policy was not the main concern when a company made investment decisions, but it was "certainly an influencing factor".[42] The Energy Intensive Users' Group's Director, Jeremy Nicholson, believed the UK's climate policies placed a large cumulative burden on energy intensive industries, but noted that, "If the rest of the world will sign up to this [emissions reduction] agenda there would be no competitiveness issue arising from this".[43]

22.  We conclude that the fall in the UK's territorial emissions was not entirely or even mostly a consequence of the Government's climate policy. Rather, it was mainly a result of the switch from coal to gas-fired electricity generation that began in the early 1990s, and the shift in manufacturing industries away from the UK in response to the pressures of globalised markets. At the same time, the emissions embedded in the UK's imported goods have increased. To complement the UK's existing territorial carbon budgets, we recommend that DECC explore the options for setting emissions targets on a consumption-basis at the national level, and to set out the steps it will take to do this when responding to the Committee's report.

Compensation for energy intensive companies

23.  In his November 2011 Autumn Statement, the Chancellor announced measures intended to "reduce the impact of policy on the costs of electricity for the most electricity-intensive industries".[44] The Treasury's aim was to minimise the "carbon leakage which might happen if investment relocated abroad".44 Beginning in 2013, the Government plans to introduce compensation measures for electricity-intensive industries that will be worth around £250 million over the Spending Review period 2011-12 to 2014-15. This was despite the fact that we had been told earlier that day that it would be "implausible" to argue that the UK's policies had resulted in carbon leakage.[45]

24.  WWF-UK's Dr Keith Allot told us that if companies were receiving compensation for the impacts of the UK's climate policies:

[...] there should be something in return—some clear commitments—from the sectors benefiting [...] in terms of increased environmental benefits from energy efficiency improvement […] Otherwise, we are in danger of giving something for nothing for generalised industry lobbying. […] The reason why Europe is struggling to show the [climate] leadership that we need […] is substantially because of lobbying by the heavy manufacturing industry.[46]

25.  We asked the Minister whether the companies benefiting from this compensation would be obliged to make commitments to increased energy efficiency, to which he responded "I expect so".[47]

26.  We received no evidence that electricity-intensive industry investment decisions were being driven by the Government's climate policy, and therefore no evidence that the compensation for electricity-intensive industries announced by the Chancellor in his 2011 Autumn Statement is necessary. If electricity-intensive industries are to be "compensated" for increases in the cost of electricity—which are being driven primarily by volatility in the fossil fuel market, not climate policy—we recommend that the Government requires the beneficiaries to make clear commitments to increased energy efficiency. In its response to our Report, the Government must set out clearly what these commitments will be.

10   Q 74 Back

11   Q 3 Back

12   Q35 Back

13   Q 36 Back

14   Q 36 Back

15   Q 76 Back

16   Ev 46 Back

17   Q 127 Back

18   Ev 81 Back

19   Ev w30 Back

20   Ev 70 Back

21   Ev 63 Back

22   Ev w30 Back

23   Helm, D.R, et al.,Too Good To be True? The UK's Climate Change Record, December 2007 Back

24   The dash-for-gas refers to the significant shift away from coal by the newly privatised electricity companies in the UK towards lower-carbon gas-fired electricity generation during the 1990s Back

25   Helm, D.R, et al.,Too Good To be True? The UK's Climate Change Record, December 2007, p 11 Back

26   Q 90 Back

27   Ev 70 Back

28   Ev w30 Back

29   Ev w30 Back

30   Q 185 Back

31   Ev w30 Back

32   Ev 95 Back

33   Q 91 Back

34   Ev w30 Back

35   Ev 63 Back

36   "Energy costs blamed as Rio axes smelter", Financial Times, 16 November 2011 Back

37   Ev 63 Back

38   Helm, D.R, et al.,Too Good To be True? The UK's Climate Change Record, December 2007, p 11 Back

39   Q 23 Back

40   Q 36 Back

41   Q 37 Back

42   Q 37 Back

43   Q 40 Back

44   HMT, Autumn Statement 2011, Cm 8231, November 2011, p 36 Back

45   Q 36 Back

46   Qq 92-93 Back

47   Q 138 Back

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© Parliamentary copyright 2012
Prepared 18 April 2012