Consumption-Based Emissions Reporting
Memorandum submitted by UKERC (CON 19)
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.
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· 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 result s 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.
· 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.
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 produc ing the imported goods and services (Peters et al, 201 0 ) . 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 memo and not allocated to individual countries. We call these "territorial-based emission inventories".
2) I n 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 En vironmental Accounts (NAMEAs)" .
3) C onsumption-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).
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.
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 consump tion-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).
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 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, ve rsatile and compatible approach f or consumption-based accounting of greenhouse gas emissions and has already become the norm (Peters, 2 008; 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.
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. T he 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 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.
Q uestion 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 ef ficiency 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 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 pro duction based measures. Figure 5 shows whether the emissions from different product groups occurred inside or outside the UK.
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).
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 ( )
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.
Qu estion 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).
· 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 CO 2 emitters, with 23% growth difference in 2008 from 1990 (for CO 2 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 CO 2 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.
Question 5 – Would it a) desirable and b) practical for the UK to adopt emissions reduction targets on a consumption rather than production basis?
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 boo st 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 res earch by Barrett and Scott (2011 ).
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.
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.
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 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.
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