Who should be responsible for emissions – producers or consumers?

What if an emissions accounting change could up-end narratives about which nations are high and low performers on greenhouse gas emissions? And what if the same change could help solve industry’s worries about the uneven impacts of climate policies on trade-exposed businesses?

That’s a strongly stated version of the promise of ‘consumption-based emissions accounting’, discussed today at side events at the COP21 climate conference in Paris.

Current carbon accounting practices – which determine everything from how Australia is performing against its national targets to whether an Australian business is breaching its Safeguard Mechanism baseline – are based on production. Whoever produces emissions – by burning fuel, for instance – is responsible for them.

But many emissions are produced to make materials or products that are traded internationally. Structural shifts in Western economies have seen them effectively outsource a lot of production – and its associated emissions – to China and other emerging economies. Consumption-based accounting ascribes responsibility to the ultimate consumer of the emissions embodied in these products.

Under a consumption approach, Europe’s emissions have gone down by less over the past decade than on a production basis. China’s emissions per capita are perhaps a quarter lower on a consumption basis.  The United States remains a very high per capita emitter on either basis.

This is interesting and it impacts arguments about relative national effort and who should be expected to do relatively more towards the global goal of keeping climate change to less than 2°C. But the real significance of consumption accounting to Australian industry is its application to the challenge of trade exposure.

The number one worry that industry has when governments put a constraint on carbon emissions – whether through a price or regulations – is that we may be disadvantaged unfairly against international competitors who do not face a similar burden. For some businesses this disadvantage could be extremely significant.

There are several ways to manage this risk, from encouraging wider international action, to calibrating Australia’s efforts and policies against relevant nations, to freely allocating emissions rights to Emissions Intensive Trade Exposed industries.

Another approach is to target policies to emissions consumption. That could mean some form of ‘border adjustment’, where carbon costs are imposed on imports and rebated on exports – leaving a level playing field for business. Or it could mean a simpler charge on carbon-intensive materials, applied to consumption of such products wherever they originate from. Either way, properly accounting for consumption emissions is vital in working out who is impacted and by how much.

Border adjustments are intuitively appealing for trade-exposed businesses – no disadvantage overseas or at home. But they have drawbacks: the worry that they may breach trade law around tariffs and subsidies; practical difficulties in quantifying the emissions embodied in imports; and the potential that this cure to trade exposure might accidentally hit a much wider circle of industries.

This last risk deserves more attention: the trade exposure of an industry like steel prevents them from passing on costs above international prices for their product. That’s a problem for the steel industry, but a comfort to every trade-exposed industry that uses steel as an input. If a border adjustment comes in, domestic prices for steel, whether local or imported, will increase; the risk is that a border adjustment solution for the steel sector saps the competitiveness of their industrial customers.

Work presented by EU researchers at the Paris climate conference suggests considerable progress on consumption accounting – uncertainties are reducing and there’s a better understanding of relative international performance and value chains. For many products most producers cluster around a common emissions intensity, with some high and low performers. Carbon intensive materials are a significant input for several industries, but for many others they are a minimal part of products’ selling prices.

In Australia, the current Safeguard Mechanism does not include any measures to address impacts on trade-exposed industry. That is not an immediate problem, since the Mechanism is not set up to impose large costs or drive significant emissions reductions.  If Government plans change, for instance through a major review planned for 2017, the Mechanism will need an answer to industry concerns.

The EU researchers’ work suggests that consumption-based policies are worth looking at more closely.  It may be that only a small number of industries are trade exposed, use carbon-intensive materials as an input, and would be significantly commercially affected by price increases for those materials. Combining a border adjustment with an industry emissions baseline could thus avoid impacts on currently vulnerable industries and be extended to additional vulnerable industries.

What is needed is for Australian researchers to build on the EU work and produce a more detailed assessment of emissions consumption within Australian industry. That will help resolve whether consumption-focused policies are a better answer to trade fears – or a blind alley.

How do you think consumption-based emissions accounting could affect your business? Share your thoughts below – or leave a question for Tennant to address in his next Blog direct from COP21.

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Tennant is Principal National Adviser – Public Policy at Ai Group. He has worked heavily on climate and energy issues, advising Ai Group’s Leaders’ Group on Energy and Climate Policy and developing reports on natural gas supply, energy prices and energy efficiency. He also works on a range of issues related to manufacturing and innovation. Previously he was an adviser in the Department of Prime Minister and Cabinet, working on fiscal policy, stimulus and infrastructure.

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