To be published as HC 1646-i

house of commons

oral evidence

taken before the

Energy and Climate Change Committee

Consumption-based Emissions Reporting

TUesday 29 November 2011

Dr ALICE Bows, Elena Dawkins and Professor JOHN Barrett

Jeremy Nicholson, Ian Rodgers, Fergus McReynolds and Dr RICHARD Leese

Evidence heard in Public Questions 1 - 60



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Oral Evidence

Taken before the Energy and Climate Change Committee

on Tuesday 29 November 2011

Members present:

Mr Tim Yeo (Chair)

Ian Lavery

Laura Sandys

Sir Robert Smith

Dr Alan Whitehead


Examination of Witnesses

Witnesses: Dr Alice Bows, Sustainable Consumption Institute, University of Manchester, Elena Dawkins, Stockholm Environment Institute, University of York, and Professor John Barrett, University of Leeds, gave evidence.

Q1 Chair: Good morning, and thank you for being here so punctually. We can start a few minutes early. Because of the importance of the business in the House later on, I am afraid we are very, very tight for time, so we need to wrap up our discussions with you by 11.00am because we have another panel coming on afterwards. But you are very welcome at this Committee. This is our first stab at doing some work in what I think is an exceptionally interesting area intellectually, and quite important for policy as well. I will skip any more formal introductions. We know who you are. We know what your backgrounds are and that is why we have asked you along.

Can I just start with a general question; how accurate do you think it is for DECC to claim that UK emissions have actually fallen since 1990?

Professor Barrett: Accurate as in they are undertaking or reporting on their emissions in the way that they are required to report under the UNFCCC, so I don’t perceive them being dishonest in any way, although I would add that since 2006, when we undertook the first major study on this for Defra, we have known for some time that our imported emissions are significant. That has always been reported by Defra because it has been seen as a sustainable consumption issue, as opposed to more of a climate change issue. I would say that they are honest about this but there is an opportunity to be more transparent by also demonstrating that some emissions, or emissions related to imports, are extremely significant in their scale.

Dr Bows: Just to add to that, there is also the issue of international aviation and shipping emissions, which arguably, are part of the UK’s responsibility as well, which have not been included in the past other than in a memo item, and those emissions, particularly up to about 2008, were increasing quite rapidly. They have plateaued somewhat but they are quite a significant portion of emissions.

There is lots of uncertainty around the shipping side; aviation is approximately around 7% of UK emissions and shipping is possibly about the same, maybe a little bit higher.

Q2 Chair: Is it true to say now that really Defra and DECC are taking different stances on how this issue should be approached and on the extent to which emissions may be falling or not falling?

Professor Barrett: I think it has been quite clear that DECC have resisted showing these emissions in the past. I think that has been fairly well known, and Defra have been quite progressive in acknowledging that these emissions exist, measuring them and committing to continue to measure them for the next five years. I would personally like to see less resistance and more transparency. I don’t think there is a danger in declaring these emissions. Suggesting that they exist does not mean we are necessarily responsible for them; attribution and responsibility are very different things. So I think it is a time to bring it together into one coherent framework and document alongside each other.

Q3 Chair: Is there a case for saying we should really publish both sets of calculations, so each of them has validity but it is just a different way of looking at the problem?

Dr Bows: Yes, I would agree with that.

Professor Barrett: I very much agree with that.

Elena Dawkins: Yes. They are counting different things and as much evidence as you can gather is beneficial in all cases.

Q4 Chair: If measured by consumption, emissions in the UK have gone up significantly in the last 20 years. Doesn’t that imply that the UK policy has been one that is contributing to an increase in global emissions?

Professor Barrett: No, we see it as an unintentional consequence. We don’t see it that UK policy has resulted in an increase in emissions occurring outside the UK. This links with the leakage question to some extent. We think it is extremely important to make a distinction between strong leakage, that is leakage that would relate directly to UK climate change policy, and weak leakage, which is the unintentional phenomena of the geographical separation between production and consumption.

One thing that is extremely important here is that all the analysis shows that it is income that is driving emissions, and that is hidden from the territorial perspective. So really, what the consumption perspective does is tell us whether our economy is progressing in a low-carbon pathway, in many ways. The fact that emissions have decreased suggests that the decoupling between economy and environment has not occurred to the same level reported when we only look at territorial emissions.

Q5 Laura Sandys: If you were developing policy and you had to choose one indicator-and we are currently using production emissions as an international platform-would you use production or consumption?

Dr Bows: I do not think that we should just choose one indicator. This climate change problem is a systemic problem. You have to take a systems view, and if you take a systems view then one indicator is only going to give you half the picture. So I think we need many indicators, and I would personally advocate that we use both production and consumption.

Q6 Laura Sandys: So you think that by using just production now we are missing quite a bit of the so-called narrative and also the impact of the policies?

Dr Bows: I think that is right. There are interesting examples. For instance, if you look at agriculture, production may be better in places like the UK under climate changes, so if the temperature rises wheat production might be better in the UK. You might want to have production in the UK because you have global demand for wheat, for instance. Under climate change constraints, the UK’s emissions would rise because they are producing more food for the rest of the world. Under consumption-based they would not be rising because they would be emissions associated with export, and if you don’t have both of the points of view then, first of all, you might not push the infrastructure for production enough, in terms of a low carbon approach. But also, you would not produce wheat in the places where it is most efficient to do so, so I think you need both perspectives.

Professor Barrett: I know at the moment we don’t touch and measure from what we would call a "production perspective" because a production perspective would include aviation and shipping, and then that would be consistent with the way that we measure the economy; we measure from a territorial perspective so the emission has to have actually occurred, and the thing we know about climate change is it doesn’t actually matter where the tonne occurs. So in that respect, if we want to measure how our economy is contributing to the global problem of climate change then we need to measure the full impact of that economy and then recognise policies from both sides. Some of those policies will affect territorial emissions more and others may affect our imported emissions.

Q7 Laura Sandys: When looking at consumption-based emissions, there are different ways of measuring it. I don’t know what your views are on which measure has greater efficacy and whether Defra’s current measure is one that you would feel was robust enough.

Professor Barrett: I do Defra’s modelling so maybe someone else should answer that.

Laura Sandys: Well, there you go. What more can you say?

Professor Barrett: I can say that there is considerable and almost unanimous agreement inside the academic literature, which is supported by some very sound analysis, that multi-regional input/output modelling provides us with a robust picture of the total change in emissions. Where variation and uncertainty exists is when we look at the sector levels and we get down to sectors. Some sectors can show considerable uncertainty. But we have considerable certainty with the overall figures. That was shown to some extent when we first did the report for Defra in 2006. They were clearly worried about the implications of that study, so they commissioned an extremely extensive uncertainty analysis to go along with that study. That has been published by Defra and also published in the academic literature. That showed additional uncertainty on the top-level figures of an additional 3%. So it was still within a range where we can say that they have gone up over time.

We have limited other methodological options to do that, and other countries are also now using input/output approaches to do it.

Q8 Laura Sandys: What would your critique be of your colleague here?

Elena Dawkins: I think there are some slightly different variations in the modelling that you can take. There are emissions embedded in bilateral trade or multi-regional input/output modelling, for example, which I have described in the submission. There are studies that have compared those two methods and one other method, and they come up with similar overall results but they do vary in their total figures, for example, by country.

I recently compared the emissions for Sweden with three different methods, one using a two-regional input/output model that was done just for Sweden and the rest of the world, and one using a multi-regional input/output model and the emissions embodied in bilateral trade. Overall, the results were saying essentially the same thing, so the consumption emissions for Sweden were higher but they did come out with slightly different results. So there is variation but generally the patterns are the same whichever method you use. That occurs over the time-series as well; the time-series for the UK has come out consistently increasing using the different methods, but just with slight variations in the overall percentages and totals.

Q9 Laura Sandys: If you were to put forward, let’s say, an international agreement based on consumption-a sort of assessment-do you think that it would be robust enough in many ways to be examined and be challenged through trying to establish an international agreement?

Professor Barrett : I would struggle to see it being implemented at that level, simply because I could just see lots of litigation. I could see lots of countries challenging all the results if it favours them or doesn’t favour them. We would not argue at this point about shifting the targets because it would also mean that you would have responsibility outside of your immediate policy or sovereignty. So in that respect, I am not sure if it would stand up to that. But what it does do, though, is add further integrity to climate change debates; it helps give insights into responsibility, into how significant clean technology transfer should be. It also, to me, asks us to consider policies that we may not have considered otherwise. While we may not have responsibility, we do have some influence over those emissions and if the global goal is to limit emissions to 2 degrees, then I think there is enough evidence to suggest that we need to almost implement every policy that we have available to us to achieve such an incredibly tough and stringent goal.

So, to me, it is about additional information to give us greater insight to widen our policy scope, not to try and totally redesign the whole international negotiations.

Dr Bows: I will just add one small point to that. One of the issues is that it is cumulative emissions that matter, not the emissions level that we get to by 2050, and that means that the more you can do in the short term the less difficult it will be to reduce emissions for a certain level of climate change. If you have a greater scope of policies that can tackle the demand side then that will actually mean that the UK is having greater influence over global emissions because it will be accounting for a greater share, be trying to influence a greater share of emissions, and therefore have a little bit more control over the ultimate climate change that will occur but also tackling demand-side policies that may reduce emissions in the very short term, which is what ultimately we really need to do.

Professor Barrett: China have quoted their consumption-based emissions in international negotiations on an increasingly regular level, I suppose. Roughly, depending on which study you look at, about one-third of their emissions are basically someone else’s. So acknowledging that that is the case is important, and this hopefully would help to lead to a more responsible and constructive discussion, as opposed to constantly suggesting that the other one has responsibility.

Elena Dawkins: Those emissions do deliver growth within their country as well, though.

Professor Barrett: They do.

Elena Dawkins: So I think that is the argument they come back with, but by the same token I think other countries might resist territorial emissions targets because they would impinge on their development goals. So maybe they will be more willing to accept that consumption approach.

Professor Barrett: That was one of the reasons why the US Bill went down. They said they would only let the Bill come in and have pricing of carbon in it if they could price the carbon on imports, otherwise it wouldn’t go through. So it can be used both ways.

Q10 Chair: This is an important subject but slightly arcane, I think, for the average member of the public. To give an illustration that might bring it home a bit, beef is a particularly clear case of where switching to consumption from production could produce quite a significant change in the outcomes-in the emissions reported. In effect, that would mean any country that is a significant beef importer would experience an increase if you measured consumption rather than production in relation to that product.

Professor Barrett: Yes it would. In figure 5 in our submission we show which products would be greatly affected by switching from one system to another, and the key products-while beef would be a significant one-at the more aggregated level we saw electronic equipment, vehicles and transport equipment, and textiles being some of the most significant, where 80% of the emissions of UK consumption of those products sit outside the UK. But when we look at the other extreme-electricity-more than 92% of emissions sit inside the UK, so therefore any policy to affect that territorially will be effective.

Q11 Chair: Those are particularly good examples because they are ones that people will easily understand, but just staying with beef for a moment.

Professor Barrett: Yes, sure.

Chair: Agriculture seems to be something that to a significant extent has escaped the attention of people trying to address the need for emission reductions, and of course with the world’s dietary habits changing to more meat consumption that is also likely to increase in the future. I am also struck by the fact that in America they eat an above average proportion of beef; are we getting to the point where it would be useful to have a little flag every time you buy a Big Mac to say what emissions you are contributing to?

Professor Barrett: This is a question about carbon-labelling, I suppose.

Dr Bows: There are lots of things that we consume, that we spend money on, that have different levels of carbon intensity. My background has been in energy, but it is interesting in the food debate-and we are working on food at the moment-there is an assumption that we are talking about the emissions associated with the full supply chain and not just the emissions that are produced in the UK, and I think people are aware of issues like food miles and the emissions associated with things that they consume. If we are going to succeed in reducing emissions in absolute terms, then we have to look at where those absolute emissions are occurring and where the most emission-intensive patterns of consumption are occurring. So we need to do research to find out-and you have done a lot of research on this already-where the most emission-intensive sectors are and how we can develop policies that tackle those sectors. So you might have to look at the supply side in terms of the actual production; in agriculture that would include the technology and the ways of reducing methane emissions from cattle, for instance, but also the actual consumption side as well. So we have to look at both the consumption and production side of it if we are going to be successful.

Professor Barrett: Could I add my scepticism on carbon-labelling to that, which is when I was at the Stockholm Environment Institute we were the independent advisors for Defra on the methods for the paths to 2050. We came to the conclusion that at the moment the data and methods were not adequate enough to do a completely comparable and consistent carbon label on a product, and I am also sceptical that people would always necessarily use that information effectively to make the right decision. Added to that, it gives the option of potentially ensuring that the carbon impact is merely included in the price, which is clearly a label that people do take account of more often, but that also potentially sidelines more progressive policy. So I am sceptical of just trying to label everything and then asking the public to make the right decision.

Dr Bows: One aspect where I think labelling might have an influence is down the supply chain and not necessarily at the consumer end, so if a supplier is perceived as having some sort of damaging label on their product that might be an incentive for them to improve the supply chain emissions. But I am the same as John, really; I don’t think that will have an influence particularly on the consumer.

Q12 Sir Robert Smith: I had better remind the Committee of my entries in the Register of Members’ Interests relevant to this inquiry, which include the oil and gas industry and also shares in energy-intensive users.

Professor Barrett, you said about electricity that if you reduced emissions from that source, that was a reduction within the territory.

Professor Barrett: Yes.

Sir Robert Smith: But isn’t there a potential perverse consequence that you have reduced the emissions because you have off-shored the industries that would have used those emissions, and so they are using electricity in another country to provide the products. So the net effect on climate is-

Professor Barrett: I suppose that could affect the demand for electricity, but what I was referring to was that lots of the policies in the Low Carbon Transition Plan set out by the CCC are to completely replace the UK’s infrastructure with a new renewable electricity system, and that specific policy would therefore have an effect. But I agree that demand will be subdued if emissions sit in imports as opposed to an increase in domestic production.

Q13 Sir Robert Smith: If you just have the production-based emissions, what are the main perverse and harmful incentives?

Professor Barrett: This is something where we declare that maybe more research is required. But we do feel we can say something about it, and that is that we may potentially ignore policies that could have a greater reduction in emissions at least cost because we are ignoring a significant chunk of options on the demand side. In the study that we undertook and have recently published in the academic literature for the Waste Resources Action Programme-WRAP-we looked at 13 resource efficiency strategies for the UK and how they could affect both our territorial and our consumption-based emissions. The consumption-based strategies were extremely more effective at achieving emission reduction, and in some cases there is also evidence that they could boost the UK economy by boosting service sectors through the restorative economy, that is the repairing of goods and services, therefore maintaining skills within the UK as opposed to buying a new imported electronic good each time. So there is some evidence that suggests they can both be effective and, at the same time, could actually be revenue generating for the UK, so they sit on the positive side of a margin abatement cost curve.

Dr Bows: If you only look at the consumption-based then there is a potential-I am not sure how realistic it would be-for the carbon intensity of exports to be ignored. So if you only looked at consumption, you might not worry if your business is only for production for consumption elsewhere. I think that is one of the disadvantages of just looking at the consumption side.

Elena Dawkins: Then if other countries have a consumption-based target and we export to them, then we would want to have the best industry possible in order to market that improvement that we have here, and actually the UK can sometimes be more efficient than other countries so that would be beneficial for us if they took on consumption-based targets and we were exporting to them.

Sir Robert Smith: It does seem that you need to look at it with both measures.

Professor Barrett: Very much so, yes.

Q14 Sir Robert Smith: Because one other perverse thing would be that presumably, for a developing country, production-based measures would mitigate against the use of fertilisers to improve their agricultural production.

Dr Bows: Yes.

Elena Dawkins: As I say, also, with things like consumption-based emissions you have mechanisms like the clean development mechanism, which is embedded naturally in that system of accounting. So you would be trying to help other countries that you are importing from reduce their emissions, and we have looked at some of the agricultural sectors in particular and found that in some of those developing countries there might be more opportunities to help them reduce those emissions and improve the emissions intensity that then would affect our consumption-based accounts when we import those goods. So it can have positive impacts on them as well, potentially.

Dr Bows: The issue around agriculture is very interesting because the non-CO2 greenhouse gases, particularly the ones associated with fertiliser, are going to be very tricky to reduce, and we are not going to be able to produce all of the food in one particular place. Food consumption and food production is going to have to happen all over the place, and different places will be impacted, and already are being impacted by climate change in different ways. So we really need to look at where it will be most efficient to produce the particular agricultural products that we need, and not penalise those countries for those emissions going up because of the fertiliser inputs that might be required. As temperature rises basically you need more fertiliser for some of these things.

Q15 Sir Robert Smith: But I suppose the bottom line is that measuring our consumptions shows our impact on the climate.

Professor Barrett: Yes it does, but it is more than that because it can show us the options ahead of us as well. So therefore, I don’t know why we would not want all the information available to us to make the best possible decisions.

Elena Dawkins: From a policy perspective as well, the consumption approach might appear more relevant to a householder if they are thinking about reducing their emissions as opposed to putting all the burden on an industry somewhere else. Thinking about it from a consumption perspective might help with that.

Q16 Dr Whitehead: DECC have said, from a policy point of view, that consumption-based reporting has very limited use in policy evaluation. Is it your view they would say that anyway, or do you think that they are perhaps looking at that from the wrong end of the telescope?

Professor Barrett: It is strange because they have used some of our analysis so they obviously find some application somewhere because, as part of the UK Energy Research Centre, we have undertaken research to understand the whole upstream supply chain impacts of energy technologies. David MacKay has been extremely interested in those results. That was derived using a consumption-based model; so they have used the data themselves. Defra have used it even further. They have used it to understand exactly how the economy is behaving and how much carbon intensity has improved emissions; how much of our emissions relate to our increase in consumption. It is being used extensively across countries across the world. So I think maybe they don’t recognise the full range of applications of models from this perspective.

Q17 Dr Whitehead: Is there a distinction perhaps between policy evaluation-where you can make better sense of consumers’ patterns and activities by looking at consumption-based reporting internally to the UK, as indeed some local authorities have done, for example-but when it comes to the UK’s borders, the sovereignty issue then looms large?

Professor Barrett: We do have other policy options beyond the consumption side. We are currently doing a significant study with UKERC and the Centre for Low Carbon Futures on the use of border carbon adjustments and how much carbon would be captured, what is the leakage of each individual sector and what are the options of extending the EUTS to account certain sectors and price them effectively. So there are options. That probably would happen more at the EU level, but there are options available to ensure fair treatment of industry, both inside Europe and outside. I feel we have a duty with such stringent targets to explore all the options available to us, so I don’t see a distinction or a concern about monitoring from both perspectives.

Q18 Dr Whitehead: Certainly, I have heard effective policy dismissals of consumption-based measuring essentially beyond our borders, that they are beyond our jurisdiction and therefore there is no great leverage on that. How would you counter that from a policy point of view, and do you think that in whichever combination you might use consumption-based emission reporting, then there is actually a policy grab beyond the UK’s borders?

Professor Barrett: I think if you draw an artificial line that isn’t relevant to climate change and the impacts that it has, you have to some extent lost sight of the overall goal, which effectively is to reduce emissions. Sometimes it is useful for us to implement policies that we could only implement within the territory of the UK, but I would not understand why we would not want to explore policies that could potentially create revenue in the UK and reduce our emissions imported from somewhere else. I don’t know why we would not want to do that.

Dr Bows: Arguably, it is already happening with aviation: when aviation comes into the EU Emissions Trading Scheme we will be influencing all departures and arrivals through the carbon price in the EUETS, albeit not a carbon price that is commensurate with the UK’s 2 degrees goal. Essentially we are going to be influencing passengers that are outside of our jurisdiction by having a policy such as that.

Q19 Dr Whitehead: Isn’t there a sense in which this produces a new paradigm of inter-sovereign relationships in the process, and therefore from a policy point of view it appears to upset the applecart very substantially, as far as what is a sort of agreed process on negotiations and discussions? Therefore it might be seen as actually harming those discussions to the extent that it sets that new paradigm in opposition to what progress you might be able to make in those other discussions.

Professor Barrett: If those discussions were so advanced that they were so close to a global cap, then I would hold back and not say anything until such an agreement was signed. Instead, I think we are at a situation where we need to overcome the barriers, and so therefore new information to me can only be useful to do that. Two things are possible here: we have to be careful to distinguish, as I mentioned, between responsibility and attribution. Calculating our consumption-based emissions does not mean we have legal responsibility over them, and clearly there is a PR job to be done in the way that we document that. But also this information could be used to try to overcome key bilateral agreements for particular sectors in particular countries. Imports from China are significant, so this information could be used to promote bilateral agreements with the steel sector between those two countries. I know that discussion has happened along those lines already. So, in that respect, I think it opens up options as opposed to limits them, at a time when international negotiations could do with some help.

Q20 Ian Lavery: In terms of the climate change negotiations, the UK at this point in time is particularly vulnerable to the international criticism because of the leakage of emissions, which is larger than all other industrial nations, and yet DECC asserts that the UK is still only responsible for 2% of global emissions. How accurate is DECC’s assertion with regards to the 2%?

Dr Bows: One thing I would just say is that Shanghai can probably say that they have 2% of global emissions. Anybody can say that they are 2%, and I just think that grabbing on to that sort of quantity and making statements on the back of it is really irresponsible in relation to climate change.

Professor Barrett: We discussed it before and we said that 49 other territories could claim 2% and therefore should they not do anything about climate change? In that respect I am not saying it is not accurate, as from a territorial perspective it is, but I think we could be careful with our language to improve our integrity at the international level by recognising that we have a greater influence than 2% from consumption-based emissions. There is also our lead, and I very much welcome the comments that the UK Government makes to try and push for a global deal that other countries clearly do not make. I feel it will add further integrity to the UK’s argument.

Q21 Ian Lavery: That is exactly right. If you think it is accurate what is wrong with the figure of 2%? What is inaccurate about the figure?

Professor Barrett: It is inaccurate in that it does not count our trade-adjusted emissions. So it is accurate from a territorial perspective, but it does not take into account the fact that we have other emissions associated outside the UK to satisfy UK consumption.

Q22 Ian Lavery: Do you think there should be an acknowledgement by the UK Government about its role in increasing emissions from developing countries and economies, as a consumer of goods and services? Do you think if they made such an acknowledgement that it would be respected? Do you think it would help or would it hinder the climate change negotiations?

Professor Barrett: My suggestion is that it would probably help and also it is not as if the UK is not doing anything to affect the emissions from its imported goods already, but at the moment that the evidence is fragmented, which is why I suggest that one of the next steps is to pull together all of the different strategies and policy areas where we are affecting them. The statement that "We recognise that we contribute to emissions outside the UK" should be followed by "and we are undertaking a number of policies, strategies and initiatives at the international level that recognises that". These could include being a strong advocate for a global cap; exploring the use of border carbon adjustments; exploring the use of bilateral agreements; exploring the reallocation of clean technologies to other countries; and looking at demand-side strategies, such as food waste and the longevity and use of products, and so on. So it can be, not spun, but organised in a way where the UK recognises its impact and also highlights what it is doing.

Q23 Ian Lavery: It is very interesting. Could this perhaps have a huge consequence on anti-trade policies with the UK?

Professor Barrett: Could you elaborate on that?

Ian Lavery: Could the emphasis on consumption-based emissions lead to protectionist anti-trade policies?

Professor Barrett: I know that there are potentially challenges for the WTO in relation to this. Recent academic analysis or analysis by lawyers, would suggest that it is possible to introduce border carbon agreements and there are a couple of clauses in relation to this, although I would be surprised if we see that. Another point is that the current price of carbon is too low to really affect strong protectionist policies.

Elena Dawkins: You are seeing it as an environment standard. If you are trying to adhere to an environmental standard and therefore importing goods that meet that standard, that can be similar to other environmental legislation where we do not import certain products below certain standards. I think it can be viewed in a similar way to that as a positive thing and potentially help encourage the mitigation efforts and shift production to those areas where it is most efficient in terms of carbon.

Dr Bows : I think there is also policy making, not just at the national level but obviously within organisations and businesses that are global and international and have reach across that, through supply chains, and I think that we are already starting to see policies being implemented within organisations to try to encourage the reduction of emissions within supply chains. So if organisations are starting to think in those terms, then we need to be thinking about that at a national level as well.

Professor Barrett: I would add that the UK is, in virtually all sectors, more efficient than the global average of those imports and a system of consumption-based accounting would highlight that the UK is performing better in terms of its emission intensity, so it is CO2 per pound spent. At the moment it potentially faces a price, even though it is not large at the moment, which imports do not. So therefore we need to find ways to encourage better carbon intensity and production inside the UK. I think this is one system that highlights a higher than average global performance by the UK.

Q24 Chair: I think there is a lot of agreement that it is desirable to measure and publish consumption-based emissions alongside production, but is it feasible to have a consumption-based emissions target?

Professor Barrett: We would say no because I would suggest you need to have a number of policy levers or a considerable number of policy levers to have control over those emissions if you were to have a target associated with them. You are at the whim of potentially other countries’ climate change decisions on whether they go up or down and therefore that becomes very difficult to police what the UK should be responsible for and what others should be responsible for. So I would not suggest a complete change or a target at this stage but we would suggest that the UK documents how it can affect those emissions in a positive way, and at the same time try and promote harmonisation at the UNFCCC in the global calculation of these emissions.

Dr Bows : I would agree with that. If we start to monitor and measure more regularly then obviously we will get better at that and we might be able to identify the aspects of the consumption-related emissions that we can influence, and maybe at that point you can start to set targets around those but obviously there will always be some emissions that we cannot necessarily have influence over and so it would be very tricky to set a target on that basis.

Q25 Chair: When you say we cannot have influence over the emissions from some items, presumably we can reduce our consumption of those items if we choose to, but you are saying the production methods used in other countries are completely outside our control?

Dr Bows : I wouldn’t ever say completely but certainly you have a lot less influence on their energy system and their electricity provision-which is the energy that is then used for manufacturing those products-but, yes, at the consumption end you would have an influence. Yes.

Elena Dawkins: I think you would have targets for the mechanisms perhaps, so targets for technology transfer or targets for helping those countries or, if you identify where your main imports are from, targets for tackling those areas in particular and trying to help them reduce their emissions intensity. The inventory for one country can be based on data availability and the quality of data in lots of other countries, because of the nature of the way the models work-in some of the models you are taking data from up to 113 other countries. So it can be quite difficult to influence all of those different areas potentially.

Q26 Chair: Even if we did not have an actual target, could we commit to try and achieve a reduction in consumption-based emissions?

Professor Barrett: Yes, I would start by recognising and understanding all the policies that could affect them, and if we were to implement those policies then I suggest it would be appropriate to judge whether those policies have failed or whether they have achieved what we hoped they would. So in that case, yes, we could do that.

Q27 Laura Sandys: Just very quickly on that, there are other mechanisms, such as when we enter into bilateral trade agreements, when we are looking at innovation, product safety can become a barrier to certain products being imported. If, over a period of time, there was similar move on high carbon consumption, do you think labelling could play a big part or a marginal part in changing people’s behaviour and also driving innovation in the sector?

Elena Dawkins: I think it is slightly model dependent because at the moment if you are looking at a 123-sector model you are looking at the average for that sector so you can definitely identify the sector that has a high emissions intensity compared to other sectors, but all the products that you potentially buy are aggregated to 123 sectors, or 57 sectors in other models, so to label one individual product and say that this is higher than another without doing some kind of process lifecycle analysis would be quite difficult at that scale.

Professor Barrett: I would say that the ability of carbon labels to do that would be limited, for the reasons that I mentioned partly before. I think this information could be more useful to drive forward bilateral agreements at the sector level to stop leakage, to address competitive issues, and also to invest to achieve the greatest bang for your buck.

Q28 Dr Whitehead: Could we talk about border tariff adjustments briefly? They might presumably be seen as illegal under WTO rules as a perceived trade barrier.

Professor Barrett: There is disagreement but there is more agreement in the literature to suggest that it would be appropriate and could be possible under WTO rules. What we could not do is put a tax that does not replicate the tax that we have placed on the product or the sector as a whole. It must emulate that policy, but there are environmental clauses where such a tax could potentially be brought into play. It is not conclusive but the literature does seem to be agreeing that it would be a possibility.

Q29 Dr Whitehead: This would be Europe-wide?

Professor Barrett: To me it would be a Europe-wide response to leakage from the EUETS. That would be the starting point, because we could not put a price on other products where we had not chosen to price that product. Therefore it must replicate the EUETS.

Q30 Dr Whitehead: So this would make an assumption about trade within Europe?

Professor Barrett: That is captured, so if we buy from a traded sector in Germany then it should, in theory-if the mechanism is working as effectively as it should do-have the same price.

Q31 Dr Whitehead: You have, as in the globe-travelling yoghurt pot, examples of products that fly in and out of the EU in the process of their production and then finally land up on your table having travelled half way around the globe, or some of the components travel halfway around the globe and then wonderfully merge in your yoghurt pot. How might that work?

Professor Barrett: Without giving a full explanation of a multiregional input/output model, those complexities are taken into account. You understand which products feed into every other product in every other country. This generates an extremely large matrix of all the interactions between industries and sectors. So we have measured the flow in and out of the UK and while I am loth to say the precise figure, I do have a figure in my head that around 80 million tonnes of carbon in the UK relates to the flow of products that go out and in again, of the 1.1 billion total from a consumption-based approach. So it is not a trivial figure and it can be measured. The project that we presented to the WTO recently on border carbon adjustments used this model. It is currently out for review and will be published shortly after Christmas, and it will show the extent of all these flows and all the leakage related to sectors coming in. The biggest problem is trying to capture those effectively because steel does not necessarily come in as steel. It comes in hidden in a car, for example, so therefore you have to be slightly cleverer than just measuring raw steel imports.

Elena Dawkins: That is at the sector level so using these models you cannot identify that yoghurt pot on its own, you can only identify the sector which probably is something like food products not elsewhere classified, or something like that.

Professor Barrett: There is a homogeneity problem, yes.

Q32 Dr Whitehead: Right, but the actual effect of border tariff adjustments would ultimately land on the consumer’s wallet, would it not?

Professor Barrett: Sure, as does any pricing of carbon. Yes.

Q33 Dr Whitehead: But under those circumstances, bearing in mind that consumers are purchasing particular things, then as you say it would be perhaps rather difficult to say, "3p on a box of yoghurt because of its world-travelling pedigree". Would you be able to do that? That would effectively put a backpack on products. Would that, in your view, make low carbon products more attractive to consumers or merely cause consumers to be completely confused about what they are paying for?

Elena Dawkins: I suppose that is the same with any carbon price, if you are allocating that to the industry, how much of that they take on themselves or how much they pass on to the consumer, or how much they manage to mitigate so that they do not have to pay the costs of that. I suppose from a consumer perspective, they would rather not pay more for their products but if we want to include carbon and if we want to include those environmental externalities that we are not necessarily currently paying for, then it is important that they are embedded within the costs.

Q34 Dr Whitehead: I am not sure I entirely understand all of this but what sort of trade-off in products-and it may be that you have had a look at this-would there be in terms of a transfer to consumers of border adjustments so that presumably there would be a number of products that would become relatively cheaper as a result. There would be a distribution trade-off in terms of-

Professor Barrett: Sure, I wouldn’t try and guess the whole supply chain of the product and then add the value at the end. It is so much easier to tax production and then let the markets decide. The prices then flow through all the interdependencies of intermediate demand and you do not have to try and guess it at the end. So to me a border carbon adjustment figure is mainly driven by competitive concerns, but at the same time I think it would be easier to place the production on the factories where it is coming from as opposed to trying to guess and estimate with all the uncertainty down the whole supply chain. So that is how the adjustment would work, I think.

I was talking to someone at the WTO about this and he said it would never happen so his advice was, "Don’t worry about it". Even though you may be able to argue that it was legal, he thought that this might be used as a mechanism or a tool to try and bring about more progressive targets territorially within other countries as opposed to a mechanism that might come into play. In reality we will have to wait and see, I suppose.

Chair: Good, that neatly brings us to 11.00 am. Thank you very much indeed for a very interesting and helpful session for us.

In the absence of the Chair, Sir Robert Smith was called to the Chair.

Examination of Witnesses

Witnesses: Jeremy Nicholson, Director of Energy Intensive Users Group, Ian Rodgers, Director, UK Steel, Fergus McReynolds, Senior Climate and Environment Policy Adviser, EEF, and Dr Leese, Director, Energy and Climate Change, Minerals Products Association, gave evidence.

Q35 Chair: Thank you for getting here very promptly to enable us to get started sooner than expected on our consumption-based emissions inquiry evidence. We have your biographies so if I may, I will ask the first question. On this debate about the impact of production-based approach to emissions, do you see it as giving it an entirely false view of the true impact of the UK on emissions?

Ian Rodgers: Are you asking, does the production-based approach give a false view?

Chair: Yes.

Ian Rodgers: It certainly gives an inaccurate view, yes. It gives a false view of the UK’s total contribution to climate change, I would argue.

Q36 Chair: Do you all share that view?

Dr Leese : I would agree.

Jeremy Nicholson: Certainly the comments we have had from other intensive sectors, as well steel and mineral products, is that we are getting an incomplete picture and therefore an inaccurate one, which is unhelpful for policy makers and indeed for the industry. We certainly do not regard consumption-based reporting as a panacea. As I am sure you will find out from this evidence session, as with the earlier one, there are a number of problems with it, but it should be part of the picture we are taking into account. It has been a concern for us for some time that not only the Climate Change Act in the UK but various other pieces of legislation at the European level have given inadequate consideration to consumption-based emissions reporting.

Fergus McReynolds: Again, I would share the view that it gives an incomplete picture. In particular, drawing on the comments from the last session in terms of policy development, it does not give us an accurate picture of what is happening and it can lead to unintended consequences because of that.

Q37 Chair: Do any of you have examples where the current production-based approach has forced manufacturing overseas?

Ian Rodgers: Speaking for the steel sector, no we don’t. We have to look at the policy measures currently in place to encourage the steel industry to reduce its emissions, and that is primarily the EU Emissions Trading Scheme. Currently we have free allowances under the EUETS. So it would be implausible to argue that current policies, which of course are based on a production accounting methodology, have resulted in carbon leakage. What we have seen is a progressive increase in market penetration by imports of steel and that is all about our relative competitiveness compared with other countries. There is no doubt that, for example, the drive to decarbonise the power-generating sector has resulted in higher electricity prices across Europe and, in particular, in the UK, and that is driving down our relative competitiveness.

I think the third impact that we will see is that, certainly in the steel sector-and I am sure Richard will say the same for the cement sector-many of our companies are part of multinational groups. The investment decisions are no longer made in London, they are made in Mumbai, Helsinki, Barcelona, and indeed Russia and the USA. That will be an influence. The UK and EU’s approach to mitigating climate change will be an influence on future investment decisions: if they think the UK is an increasingly expensive place to manufacture steel, they are more likely to put limited investment funds into other countries.

Dr Leese : If I could just add to that. In the written submission from the Mineral Products Association I drew attention to the announcement from Lafarge, one of the world’s biggest cement manufacturers, who put a hold on investment in Europe and cited climate change policy as part of the reason for that. More recently we have seen in local press in the UK emissions trading cited as potential impact for a company that is looking at losing jobs in the workforce. I don’t think it can be claimed to be the whole reason, as Ian said, but it is certainly an influencing factor either on investment or on decision making to close plants in what are the worst market conditions that we have seen since records began in the cement industry in 1950.

Jeremy Nicholson: The concern we have had raised by most energy intensive industries is not so much about imminent closures, although there have been one or two high profile closures announced recently where concern about the influence of environmental costs on energy has been a factor. The primary concern is investment leakage, investment-as we have heard from multinational businesses-that can go elsewhere, where the risks are perceived as being lower due to less onerous climate policies, sometimes in other parts of Europe, but more particularly outside. We do have examples, if the Committee would be interested, of increased import penetration in glass, ceramic, brick-making production and other intensive industries that appears to have accelerated in recent years. Of course, that is not in itself evidence of change that has arisen as a result of climate policy, but it is consistent with it, and we believe it is a factor. It was certainly a factor in the recently announced closure of the aluminium plant in the North East.

I would also remind the Committee that important though the EU Emissions Trading Scheme is, it is only one client policy measure that impacts our members’ bills. Obviously for bigger electricity users one should include electricity taxation in the form of the climate change levy and now also the UK-only carbon price floor, and of course the mounting costs of renewables as well.

Fergus McReynolds: Building on that in terms of wider manufacturing, those questions over investment and investment in the UK are not only being asked by multinational companies. We are seeing evidence from our membership that they are exploring investment in other regions, and-I will echo the points that have been made by my colleagues-while that is not entirely carbon legislation, part of it is. Carbon legislation is part of the cumulative effect that these policies, which are not being borne by other regions, are having on investment decisions. Again, we have evidence of that and we would like to share that if you would like.

Q38 Chair: To get a better handle on the consumption approach, you need more robust data. Tata Steel suggested that to start with we should have a default worst-case assumption on the consumption data until the people can come up with better data sets and maybe that would incentivise industry to produce clearer consumption data. Is that something you share?

Ian Rodgers: Yes, I think it is probably appropriate if both Richard and I answer this question because the profiles of our sectors are very different. For something like steel, which is a material at the start of some very complex supply chains, the process of calculating embedded emissions the further downstream you go becomes far more complex. Certainly, if we are just looking at the imports of steel products themselves it is very easy to take the approach as suggested by Tata Steel of taking the worst-case figure for embedded emissions in a steel product and then allowing the producers in another country to demonstrate that in fact their emissions performance is better than that, and then you can start adjusting the data accordingly. But the further you go downstream the more complex the calculation becomes, as the steel gets incorporated into components and into vehicles-and we heard earlier that vehicles is one of the largest sectors where you get this distortion between production and consumption-related emissions.

Dr Leese : Yes, I think for cement it is obviously much easier. It is a standardised product in many respects and factors can be used if you either import cement or its intermediate clinker into the UK. We have seen, as I put in the written submission, that imports into the UK are around 10% for cement, and that 10% is not currently counted within the Climate Change Act and the Committee on Climate Change budget reports. I think it would be responsible of us to start calculating the consumption emissions but I think it is a first step. We have to recognise what the numbers are before we go into something more detailed such as targets and I think for some sectors it is going to be easier. As Ian mentioned, there are supply chain difficulties with doing that. We should not forget the supply chain issues once materials arrive into the UK or are produced in the UK. In the cement industry, for example, cement is largely used in concrete, and concrete used in buildings with a high thermal mass can be much more efficient than buildings without a high thermal mass. We should not forget about the lifecycle of products and their benefit to society. Our glass colleagues, if they were here, would tell us that making a triple-glazed product is more CO2 intensive, but in the long run it would save energy.

Q39 Ian Lavery: Just on something you have already mentioned, at the aluminium smelter in Lynemouth-which is in my constituency-they have said quite clearly that, as a result of high energy prices and the cumulative burden of emission taxes within the UK, they are going to close the business unless they can find a buyer. How much of a cumulative burden are the UK’s emission reduction policies?

Jeremy Nicholson: There is some uncertainty about the precise figures, but if we start with the estimates that are produced by the Department of Energy and Climate Change themselves-which we suspect are underestimates, but nonetheless are considerable, and I think they are a good starting point-we can see that there could be increases in industrial electricity prices in excess of 40% by the end of the current decade, purely as a result of the cumulative burden of climate policies such as energy taxation, emissions trading, the carbon floor price and the various subsidies for renewables. There is uncertainty about the percentages there because we do not know what is going to happen anyway to fossil fuel prices over that period. Then there is also the question of the cost of direct emissions, the process emissions in industries like aluminium, steel, cement and so on, which to some degree are covered by free allocation under the next phase of the emissions trading scheme but not equally in all cases. I do not think there is any doubt that if you do an analysis of the sort of industries that are most at risk, it is precisely those such as aluminium that are the most electro-intensive and the most trade exposed. Of course the unfortunate decision about the Lynemouth smelter follows not long after the closure of the Anglesey smelter, where the issues were slightly different and that was in the depths of recession. However, lack of access to secure, predictably priced and adequately competitive low carbon energy supplies was a factor in the closure of the other smelter too. I think it is imperative that we learn lessons about this before less electro-intensive sectors are in due course affected by similarly difficult decisions.

Fergus McReynolds: Also, if I may comment, we have produced a piece of research that compares the electricity prices for electro-intensive industries in Germany and those prices in the UK. Looking at those from the most recent complete year in 2010, the differential between those was 10% and our estimates would see that rise by 2013 to a 15% differential, of which 24% of that price in the UK would be borne by carbon legislation, by climate change legislation. So from 2013 there is a growing difference between the prices of electricity that are paid across Europe as well.

Jeremy Nicholson: Further to that, there is a very great difference in the extent to which European member states place the burden of climate policies on these intensive trade exposed industries. For example, on a recent trip to Germany with the Energy Minister, Greg Barker, we met a number of German industrialists and learnt a lot about what was happening there. Whereas the standard rate of renewal subsidies is €35 per megawatt hour in Germany currently, which is paid by most consumers, a large electro-intensive business might only be pay €0.5 per megawatt hour and there are up to 90% discounts available on the €20 per megawatt hour eco tax. I mention these as two other climate policies that have just as much impact on the operating cost of an aluminium smelter or another electro-intensive business as the cost of the EU Emissions Trading Scheme, significant though that is. I do think we need to ask ourselves questions.

We will get back on to the specific issue of consumption-based reporting in a moment, but the issue we are trying to address is the competitive imbalance that arises from all these policies, and it is not, by the way, just confined to having a level playing field between Europe and the rest of the world, the UK needs to ensure that we have a level playing field within Europe as a bare minimum to allow manufacturing to remain here.

Dr Leese : If I could just add to what has been said about the cumulative costs, in the cement industry and the lime sector, which I represent, the principal costs are from direct emissions. If we see full auctioning in the EUETS, the cost to the cement sector could be €63 million per year at €30 per tonne of CO2, and the lime production costs would increase by 50%. Work has been done to illustrate the impact, or the potential impact, of carbon leakage on the cement sector whereby the whole of the UK’s cement and clinker production is at risk at just €24 per tonne of CO2. So that is just one element. Added to that is the carbon price floor, where in 2013 £2.5 million will be added to the electricity bills of the cement manufacturers and £600,000 to the lime manufacturers. My members are also in climate change agreements in the carbon reduction commitment in their wider business. So layer upon layer of added carbon tax, which, with two sectors listed as the most vulnerable to carbon leakage on the European list produced by the Commission for EUETS, lays those sectors vulnerable to any unequal carbon taxation.

Q40 Ian Lavery: Is it fair to say that cumulatively the burden is still high as far as the four individuals are concerned, representing different parts of energy-intensive industries?

Jeremy Nicholson: I think it is unquestionably the view from the energy-intensive sectors that we work for and hear from, but, of course, it has to be seen in context. If the rest of the world will sign up to this agenda there would be no competitiveness issue arising from this. In some utopian world, we would have a global price for carbon, but the question is what we are going to do until we get there. The Committee has been asking about whether we should be looking at order tax adjustment or other mechanisms and there are advantages and disadvantages of that, which I am sure we will explore. But we are such a long way off an equitable pricing-in of carbon, even incidentally on a consistent basis with respect to taxation and renewable support policies within Europe, let alone outside. This is a risk issue for industry. We should not exaggerate that risk but it is hardly immaterial and it is a major factor-in some cases, the dominant factor-in some of the recent closure announcements that we have heard.

Q41 Ian Lavery: You mentioned before, Dr Leese, the introduction of the carbon floor price in 2013. Do you think that is going to make things better or will it make things worse?

Dr Leese : It will make things worse. It is directly off the bottom line. That is £2.5 million off the bottom line of the cement sector-a sector that has seen a reduction in output of 34% since 2007. We are probably one of the worst affected sectors by the recession because we supply directly into the construction sector, so it can only make things worse.

Ian Rodgers: In the case of steel, particularly the electro-intensive steel making process, which is the electric arc furnace, it will be an immense extra burden and one that is of dubious environmental benefit because I have certainly seen green economists argue that the net effect of the carbon price floor will be to increase emissions in other EU countries to the same extent as the UK reduces its emissions. So it is ultimately a fairly futile tax.

Dr Whitehead: But it does raise lots of money for the Treasury.

Chair: In the short term.

Q42 Dr Whitehead: How do you distinguish between what you have defined as carbon leakage and the other factors that may lead to, say, a shift of manufacturing out of the UK relating to low cost labour force, availability of natural resources, and so on? How do you tease the actual effect of carbon leakage out on the real processes as opposed to theoretical threats of carbon leakage, which is what essentially we have been talking about here?

Ian Rodgers: I don’t think you can definitively arithmetically isolate one factor, but if we look at steel, firstly, it is a capital intensive sector not a labour intensive sector, so labour costs are of relatively less importance. In terms of raw materials, if we look at the largest steel producer in the world, China, they import all of their iron ore just in the same way as we in Europe import all of our iron ore. So, again, in terms of access to raw materials, the Chinese industry certainly has no comparative advantage.

The other major cost is energy and therefore discrepancies in energy costs have a disproportionate impact on sectors such as steel than on other less energy intensive sectors. I don’t think you will ever find a decision that is based purely, simply and uniquely on climate change policy; there is always a whole host of other factors coming into play.

Dr Leese : I would agree with Ian, the cement sector is not a particularly large employer so labour costs are probably not a huge factor. As for access to raw materials in the UK, limestone is one of the most globally abundant raw materials and all of the cement sites in the UK are sitting on 50 to 60 years’ worth of reserves and yet we still see imports in the range of 10% to 13%.

Jeremy Nicholson: Further to that I think no one would question in the intensive industries that decisions about closures or indeed starting up new plants rarely hinge on one single factor, but let’s face it, if you are running a chemical process such as chlor-alkali chlorine production or industrial gases, energy could be accounting for anything up to 70% of your production costs, it is about 40% to 45% for aluminium smelting, and typically a quarter of the cost or thereabouts in steel production. This is such a big factor in any commercial decision, it would be strange for additional costs related to climate policies not to have some bearing.

As to teasing out which of two or more factors may have been influencing closure decisions, I would draw an analogy to something that happened five or six years ago, completely unrelated to climate policy, which illustrates the sensitivity of these industries to energy price rises. Five or six years ago, the UK had some problems with the competitiveness of our gas pricing as we were making the transition to import dependency-unrelated, as I say, to climate policy-in the year or two that followed, we saw both temporary production reduction in a number of gas-intensive industries and some permanent closures too. That is an illustration of how sensitive gas-intensive industries were to gas prices becoming uncompetitive internationally in quite a short space of time. I think we would argue that the danger is that we are heading into similar territory if electricity prices become similarly out of line for those industries, whether as a result of climate policy or otherwise. I don’t think that fully answers your question, but it does illustrate the sensitivity of these industries to a major input cost becoming significantly out of line with one’s competitors.

Fergus McReynolds: In terms of wider manufacturing, it is difficult to disaggregate between all of the impacts, but a recent survey that we ran with senior executives from the manufacturing sector said that two thirds of them saw opportunities in the low carbon green economy in supplying and also being part of that economy, but only one in eight thought the place to invest in that was in the UK. The examples they cited were in terms of consistency, and climate policies were part of that, as well as the growth strategy. So it is a concern.

Q43 Dr Whitehead: So in terms of energy-intensive industries particularly, you again have a question about which end of the telescope you would look at it through. While one may say that in terms of the UK landscape, energy-intensive industries are by their name rather intensive users of energy, nevertheless by international comparison they are not as intensive as other energy-intensive industries elsewhere in the world, therefore perhaps consumption-based accounting could put that into context. It has been argued from a global ecology point of view that keeping energy-intensive industries in the UK rather than exporting them is overall rather a good thing.

Dr Leese : I think it has to be, not just because if you compare a plant in the UK with a plant in, say, the Far East you might find that the plant in the Far East is quite efficient, because there are some new plants out there. But in getting the material from the Far East into the UK-and not just the transport emissions, but all the emissions associated with supplying that plant in the Far East- makes, generally speaking, the footprint of supplying that material to the UK higher. I don’t think we should ignore that in our greenhouse gas accounting.

Ian Rodgers: I would echo that. Looking at the two different steel-making processes, for the electric arc furnace, the carbon intensity of steel produced through that route is almost entirely dependent on the carbon intensity of the electricity generated to produce the steel, and obviously it is the carbon intensity of the UK grid that is the prime consideration. So compared, for example, with steel produced in China where they are heavily dependent on coal, then, yes, UK steel and European steel would be less carbon intensive. Looking at the other steel-making process, as Richard said, it depends how modern the plant is. A lot of plants that have gone up in China are brand spanking new and will be state-of-the-art, but there is also a huge tale of old inefficient plants emitting twice as much carbon as we would normally emit in Europe.

Jeremy Nicholson: In the energy intensive users group we have done a number of projects, together with the TUC, looking at both the impact of climate policies on intensive industries and the opportunities for decarbonising them, and currently we are working on a report looking at those sectors’ contribution to the UK economy, which is considerable.

As we have heard, none of our members are unalive to the possibilities of the green economy in terms of demand for their products, the question is whether they are going to carry on making them here or whether the economics are going to increasingly dictate that these products are imported. The examples of these are legion. You cannot build wind turbines, onshore or offshore, without a considerable quantity of cement or steel. Where is that going to come from? Similarly for expanding transmission and distribution grids, or for high speed rail, or indeed for nuclear or tidal barrages and so on. Civil engineering input into that is significant and this would be an opportunity for any manufacturer: the problem comes if one of your single largest variable costs is being pushed out of line with our competitors not so very far away on the borders of Europe and further afield.

Q44 Laura Sandys: You have raised a very, very interesting issue. When you go out and you procure through your supply chain and you buy steel or iron ore, you are looking at aggregates. In many ways what you are doing-and I am sure you are very efficient at it-is buying at the best price, looking at long-term supply, ensuring that you are keeping your input costs absolutely as low as possible, and then in parallel to that you say that if one was looking at green energy rather than carbon-based energy you would obviously be able to minimise your input costs quite significantly. Have you thought, now we are trying to open up the electricity market, of going into generation yourself?

Ian Rodgers: In fact every integrated steel plant in the country does generate its own electricity using waste gases that are produced elsewhere in the process.

Q45 Laura Sandys: But is that green or is there some carbon dimension to it? Is there some form of reduction that you can establish by using waste energy to generate-

Ian Rodgers: Yes, sorry, that is precisely what we do and integrated steel plants have been doing that for decades.

Laura Sandys: Right, I apologise for my naivety.

Ian Rodgers: No, no. The processes of firstly turning coal into coke, and then secondly of smelting iron ore and coke into liquid iron, both generate significant quantities of gases which are combustible. Those gases are collected and reused elsewhere in the plants.

Q46 Laura Sandys: How about reengineering your processes and looking at green sources of energy as part of your production?

Ian Rodgers: In the integrated sector, the main source of energy in effect is the coal that is used to produce coke, which is there for its chemical content. The coke is used in the blast furnace as part of a chemical reaction. You need the carbon in order to-

Laura Sandys: I am showing amazing naivety-

Ian Rodgers: I am at the extent of my own technical knowledge, I assure you. This process-the blast furnace process-has been taken virtually to the limit of how carbon efficient you can make it. So the industry across Europe is now looking, in a collaborative project, at what is the next step-change technology that we need, which probably will involve carbon capture and storage, but also with other technologies added on so that we can achieve that technological leap into a lower carbon form.

Q47 Laura Sandys: To be frank, that must be the very big prize for you, if it is your largest component of cost within your production-or one of your very largest-innovation in that sector must be extremely important for you.

Ian Rodgers: Indeed, it is a multi-Euro research project that is going on collaboratively. It has to be said, though, that if-for example-we fit carbon capture and storage on to our blast furnaces and we can prove that is technologically feasible, that will entail not just huge capital costs, but also higher operating costs. So you do not necessarily get a cost improvement as a result of being more carbon efficient.

Q48 Laura Sandys: Yes, but it would take away the carbon dimension that you are complaining about, that you are saying is a major problem in making those investment decisions.

Ian Rodgers: It would reduce that carbon dimension, yes.

Dr Leese : Likewise both the cement and lime sectors are researching carbon capture and storage, because in the cement sector 60% of the emissions come from the burning of limestone, so it is the process emissions rather than the combustion of the fuel. In the lime sector, it is as much as 70% process emissions, but carbon capture and storage will double the capital cost of a cement plant and double the operating costs. So it is out of reach at the moment, not just technically but economically.

But coming back to your original question about fuel switching, in the cement sector we have done a tremendous amount in terms of switching away from fossil fuels. We now replace 37% of the thermal requirement of the kilns in the UK with waste derived alternatives, a good proportion of which are biomass fuels. We have seen a 57% reduction in CO2 emissions in the cement sector between 1990 and 2010, so we have done a huge amount in terms of fuel switching. The lime sector too is starting to use waste-derived fuels in the speciality lime sector.

Q49 Laura Sandys: I am sure a lot of your members are in the business of developing more efficient-

Jeremy Nicholson: Indeed, but I would point out that the solutions for self-generated energy supply and for improving efficiency and reducing the carbon footprint are going to be different for different intensive sectors. There is already a lot of combined heat and power in the industrial sector, more I think in industry than any other sector of the economy, and in sectors like paper it is used routinely. For other processes, it is less practical to have on-site generation but that does not mean there cannot be long-term contracting arrangements with low carbon baseload energy suppliers. I think we are all looking to the electricity market review process here to see whether options, particularly connected with nuclear but other low carbon baseload may be feasible and therefore act as part of the solution to address the carbon leakage question that obviously the consumption versus production debate is designed to address.

Q50 Laura Sandys: But that is predicated on us being successful in getting the investment into the low carbon energy sector?

Jeremy Nicholson: It is, and some of that-at least for secure, competitive, industrial baseload-is coming rather late for a number of our members.

Q51 Laura Sandys: Could I ask a question mainly to Mr Nicholson because it is more to do with general manufacturing rather than energy intensive industries.

Chair: In which case it might be better-

Laura Sandys: Sorry.

Fergus McReynolds: That is fine. No, sorry, I think it may be that I would be better placed to answer that.

Laura Sandys: About manufacturing? Light manufacturing, not energy


Chair: Yes, the brief was wrong. Jeremy Nicholson is energy intensive.

Laura Sandys: I do apologise. At least I read the brief. When one is looking, let’s say, at different forms of manufacturing, there many questions about China and competitive advantage and what impact our change policies are having. When you really look at things outside the energy-intensive sector, in many ways we are really talking about labour costs rather than climate change policies, are we not, which really make the difference?

Fergus McReynolds: I think it is part of the picture. I think the discrepancies or the differences in terms of labour costs are themselves reducing over time-

Laura Sandys: Yes, it is not inflationary.

Fergus McReynolds: -in China, and it is not perhaps the bargain that it once was that you could offshore to Asia and it would be cheaper to manufacture. I think in terms of what we are seeing is also the quality and the value that is added in terms of manufacturing here in the UK, there are supply chains that want the supply to come from here but it is about ensuring that that is competitive. For some of those issues-I think I made the point earlier-the effect is cumulative, it is step by step, a percent here and a percent there, but overall there is a marked difference. Those areas where we are significantly different are on those climate policies. I think the message that we have from our membership is that their supply chains, the people that are supplying-

Q52 Laura Sandys: You do not think the change in employment legislation would be more of an issue than our climate change legislation?

Fergus McReynolds: For me it has to be in the round, and we produced a report Green and Growth in September this year that looked at the wider growth strategy in the UK and whether that itself was being impinged on by UK climate policy. We are about to publish in the middle of December our follow-on report that looks at the solution to this, and a large component of that is about how the growth strategy in the UK needs to support investment in the UK. So it looks at the impact of the climate policies, how we think that could be improved but also what we feel is necessary to improve the investment in the UK through the growth strategy. I agree that both of those things that need to be looked at, but they need to be looked at in the round and not separate from each other.

I think in terms of what we are talking about here today, the same could be said about the consumption agenda. Not that the consumption agenda is the one thing that we should focus on, but it is the area that is lacking currently from thinking in terms of how we address our climate change impact.

Q53 Ian Lavery: The Stockholm Environmental Institute considered the challenges to a border tax adjustment and looked at the border tariffs. In your view, would a border tariff adjustment make the UK a more welcoming place for manufacturing or would it have an adverse effect on the UK?

Ian Rodgers: Firstly, the UK cannot unilaterally impose any tariff on its borders, that is an EU prerogative so it would have to be the EU as a whole. Secondly, yes, there has been a lot of work looking at how one might be able to make border adjustments compatible with the WTO. That work has just shown how difficult it is-a joint report produced by the WTO and the UNFCCC, I think it was, said that the key consideration within the WTO is the notion of national treatment. So you would have to treat imports at the border in exactly the same way or pretty damn similarly to the way you treat domestic products.

We heard in the previous evidence session that you could, for example, have product standards whereby, for example, only fridges achieving a certain level of energy efficiency could be put on the market in the EU. That sort of thing is fine but that is not looking at the emissions produced, the emissions made, during the production of the goods. The question is how to achieve national treatment for that, in the context of the EUETS, which for products like steel and cement will continue to be a proportion of free allocation right through to 2020. There will be a balance of allowances that will have to be bought, but the impact of that on each company is going to be different; so how would you emulate that at the border by applying a similar tax to a Chinese steel product that equated to the cost that European steel was incurring at that particular time? It would be impossible. It would be a lot easier if we had a European-wide carbon tax instead of the EU Emissions Trading Scheme. I think that would still be of immense technical complexity to achieve national treatment, but nevertheless currently I do not believe that you could construct a border mechanism, either volume or value related, which was WTO compatible.

An alternative route, of course, would be to negotiate a multilateral agreement whereby all the participants-and this may well be a route to take if we ever do establish consumption-based targets-agree to suspend their rights in the WTO. The measures might not be compatible with the WTO agreements themselves but it would, in effect, mean that you didn’t get trade disputes, because everyone has multilaterally agreed that there will not be such trade disputes. In the absence of that, I think border tax adjustments could lead to some serious trade disputes.

Q54 Ian Lavery: Just on a point of clarification, are you saying that legally there could not be a UK BTA?

Ian Rodgers: Legally there cannot be a UK BTA, no. We do not have control over measures applied at our borders on the import of goods. The Treaty of Rome put that entirely within the hands of the European Union.

Q55 Ian Lavery: Do you think in any event, if we were to have a BTA it would be unworkable because of the complexity of working out the carbon content of what comes in from different companies?

Ian Rodgers: Yes. Complexity makes it very difficult, complexity also makes it very difficult to make it WTO compatible.

Dr Leese : I think there has been some literature on the subject and there is a debate about whether it is WTO compatible or not. I think some conclusions say it might be easier for a product like cement and clinker, where there are fewer countries, to upset with such a move because the imports are not so great and it would not be imported in a product such as a car, as steel would. But border adjustment mechanisms would be important, and consumption-based accounting would give you the information to judge whether border adjustment is possible. The possibility of border adjustment mechanisms then gives you the leverage to use in an international agreement. I think it is that important dynamic that could lead us to a better accounting system for the globe as a whole.

Q56 Dr Whitehead: There is a further problem of disaggregation, isn’t there, in terms of looking at UK’s consumption-based emissions either from the point of view of a loss of UK’s market share to imports or alternatively just to the fact that we like consuming things and therefore we are consuming rather a lot more and we keep on doing so. How might one get a handle on that?

Dr Leese : In cement we are one of Europe’s lowest consumers of cement per capita. So in that respect we could still import and still consume what we need to consume.

Ian Rodgers: I think environmentalists might respond by saying, "Does it matter? Does making this distinction matter?" If the objective is to get global emissions down, that may well mean that people have to consume less.

Q57 Dr Whitehead: Presumably the squaring of the circle is putting a premium on a product that has lower embedded emissions and presumably, among other things, saying, "Buy my bag of cement because it has got sewage and car tyres in it rather than being made with very carbon intensive methods". Are there methods by which consumers could be persuaded to distinguish, do you think, embedded carbon in products for consumption?

Jeremy Nicholson: I am not clear that there is a great drive from consumers for energy intensive products from low carbon sources yet, although that may come. I think we may see this in the construction sector, and my colleagues will probably want to talk about that in a moment-steel and cement that are being used for "low carbon" housing and so on, so that it is low carbon in construction as well as low carbon in operation. There seems to be very little evidence that there is large consumer demand when you ask people to pay a premium for "lower carbon" products yet. One would have to be very optimistic to think that carbon labelling would make a great deal of difference to that and I think the danger-as we heard with earlier evidence-is that a lot of time and effort is spent on that to little effect. But at a macro level, understanding something about the carbon footprint of products and indeed basic materials, both in a production and consumption sense, could be extremely valuable. I don’t know how much we can learn from recent history on this, but you mentioned the difference between change and import penetration and growth in demand for products, but there could be things to be learnt from the recent recession where we have seen a savage reduction in the demand for certain goods and yet in terms of brick-making, glass and one or two other products we have seen import penetration increase over that period at the same time. So that might indicate something about increasing vulnerability to import penetration in those sectors, even if the overall demand goes down.

Ian Rodgers: We have definitely been seeing quite a lot of call from within the supply chain for more information on embedded carbon in the products that we supply. In the construction industry certainly, which is a relatively simple supply chain, but also elsewhere in manufacturing, it is relatively easy to provide data for a generic steel product. The problem comes where you seek to buy the steel product with the least embedded carbon. Which steel product has been produced most carbon efficiently? The data just does not really exist currently to do that. So the sort of data that is going down the supply chain is generic data about steel as a product. So it is not really driving purchasing decisions as to which source of steel to buy, but might driving purchasing decisions or design decisions in terms of which material to use in a product.

Dr Leese : I think in my membership, the asphalt sector, you can get the carbon footprint of the asphalt plant that is your supplier but, as I mentioned earlier, the embodied carbon issue is sometimes a bit of a red herring, because while there is a wealth of information on the carbon footprint of cement and concrete, it is how you use that concrete in a building that is really important. Designing the right building has shown that after just 11 years, the CO2 investment-some would call it penalty, some would call it investment-in the concrete in a high thermal mass building would be paid back. Now, we all build buildings to last a lot longer than that, particularly concrete buildings and heavyweight buildings.

Q58 Dr Whitehead: The suggestion of what is being said is that, from a procurement point of view, being able to procure on a low carbon specification would be fraught with difficulties?

Ian Rodgers: I think it is fraught with difficulties currently, on current knowledge of the data, certainly for steel. I echo the point made by Richard that for sectors like construction, it is actually asking the wrong question-it is far more important that buildings are designed to perform in a carbon-efficient way than that they use one steel product compared with another steel product that might have marginally less carbon embedded in it.

Fergus McReynolds: I think there is a good point to be made there in terms of procurement, be that public sector procurement or procurement within complex supply chains, looking at an outcome approach so that consumption emissions or perhaps lifecycle analysis give you a good indication of the outcome that you want to achieve. So, for example, in construction, it would be housing stock that is low carbon over its lifecycle, including its construction and its inhabitant. There is a good argument for outcome-based procurement strategies as well.

Q59 Laura Sandys: Would looking at a consumption-based approach allow the hot spots in the supply chain to be identified? You talk about an audit of your supply chain to give us more information about where energy-intensive activities are happening within that supply chain: would it deliver greater transparency and in many ways possibly deliver greater innovation?

Ian Rodgers: Potentially it could. On the level of today’s knowledge, no, it would not. You would need a lot more data on an individual company’s carbon efficiency to identify carbon hotspots in the supply chain. I would see it as a natural development from just starting off with consumption-based accounting in the first place. As we become more sophisticated with the data then it is the sort of thing that might show up, yes.

Fergus McReynolds: I think I would agree that when you have the capacity to do so it is a hugely valuable tool, but it is very difficult. I think there are mechanisms for looking at embedded carbon, but there are-for a lot of SME companies-barriers to doing so in terms of the cost of looking at carbon footprints, particularly looking at a single product carbon footprint. Some of the major suppliers of that evidence will charge in the region of £30,000 to £40,000 to look at an embedded carbon footprint for one product. So there are barriers. There is work ongoing at the moment and it does have value when you can identify those hot spots in this sector, because sometimes it shows up something that you would not have realised and gives you a clearer picture of exactly where you need to concentrate.

Dr Leese : Perhaps I could give an example of what could be lost in the supply chain if we do not go towards a consumption-based accounting system. My lime members supply the steel sector, which as a by-product produces ground granulated blast furnace slag, which is then used in cement and concrete production. In cement production, we use over 1 million tonnes a year of by-products and waste materials and yet we only produce about 15,000 tonnes of waste as a sector. In the industrial supply chain in the UK, there is an added benefit to having a domestic cement production and steel production and so on, and that will be lost if we do not go towards some kind of consumption-based accounting.

Q60 Laura Sandys: While I know there is a resistance to some of the climate change legislation, in many ways it is driving innovation and is an incentive for you to look at the supply chain more effectively, for example. Would you say that when you are looking at your UK production as opposed to other parts of your international companies, that in the UK and in Europe you are innovating more effectively, or are those investments decisions just being made very clear-black and white-that this is a more expensive market to operate in than X, Y and Z?

Jeremy Nicholson: Recently, unfortunately, I think it has been more towards the latter and you can understand why. It is not because there is an anti-environmental attitude in industry: if there is money to be made out of the green agenda you would imagine that the investors in it would leave no stone unturned to ensure it is suitably exploited. But these are difficult times, and small differences in the cost of producing something in one region as opposed to another-when margins are under pressure, and economic growth is slow or non-existent in parts of Europe and beyond-make a big difference. This is not a comfortable time for people to be making speculative investments, whose success may depend on the political and economic sustainability of some of the climate policies we have adopted here and elsewhere. You can understand that in the current international context that is a difficult thing for someone to bank on.

Ian Rodgers: There is no doubt that for industries such as steel and cement there is a lot of economic logic in making the product as close to the customer as possible, for all sorts of reasons. I think it is unlikely that any of my member companies are suddenly going to say it has got too expensive for us in the UK, we are going to shut down this blast furnace in wherever and move it to China or India or Russia or somewhere where the cost base is more attractive. I don’t think that will happen but what we will see is a progressive loss of market share to imports coming from lower priced countries if we don’t ensure that the costs of operating-the climate-related costs of operating-in the UK are not kept broadly comparable with those elsewhere.

You mentioned the word "incentives", and that brings us to the issue of the stick or carrot approach. If we get assistance with research and development, for example, that will immeasurably help us take the next technological leap. If we are hit by higher costs as a result of having inadequate allowances in the EUETS, for example, that will have the opposite effect.

Laura Sandys: Thank you.

Chair: Thank you very much. Thank you for your evidence, it has been most useful in preparing our report and it is a fascinating area to explore at this time with so many challenges facing the industries. Thank you very much.

Prepared 9th December 2011