Repatriation of Exported Emissions: The Next Big Investment Opportunity?

16th May 2019

It is well known that nearly all the goods we consume are supported by a worldwide network of mines, pipelines, railways, ports, factories, and warehouses, and that this is the global nature of modern trade. Whether that be simple household items (such as clothing, stationery, and food), or more complex items (such as cars, machinery, and jet engines), it is highly likely that some element of the products that you use on a daily basis will have been made outside the country you live in. Whilst many people are aware that this set-up has an associated carbon footprint (for example, many people will be familiar with ‘food miles’), in reality it is extremely difficult to calculate this carbon footprint. Particularly as this requires detailed information relating to how much of the product is produced, where it is produced, and to whom this carbon footprint should it be attributed.

Another complicating factor is that a product’s associated emissions are generally attributed to the country they are produced in, not the country that consumes them. This is an example of production or territorial based emissions reporting, i.e. accounting for where the greenhouse gases (GHGs) originate. The opposite is consumption based emissions reporting, i.e. where the product is consumed [1, 2].

For example, China produces a lot of emissions related to the manufacture and shipping of goods. These emissions are generally attributed to China’s overall emissions, however, some of these goods are exported to and used by the UK. Should these emissions be attributed to the UK or China? Some would argue that ultimately it is up to the UK and China to reduce emissions, whether that is via reduced purchases of Chinese goods by UK consumers or improvements in energy efficiency and use of renewable power in China. This might seem trivial, but it is an important issue, as otherwise the key to cutting greenhouse gas emissions for any country would just be to outsource them. Especially as some like to proudly assert that the UK’s greenhouse gas emissions have fallen whilst the UK economy has grown. Whilst technically true, this does not account for 30 years of ‘offshoring’ manufacturing. The UK’s economy has changed quite drastically over that time period, with many carbon intensive industries moving to other parts of the world. It is the low-carbon service sector that has driven UK economic growth over the past 30 years and not the high-carbon industries of old. And although the service sector has replaced much of the traditional industry but we still enjoy the benefits of steel, industrial chemicals, energy etc, even if they are produced elsewhere.

Exploring UK GHG data in more detail, the UK government tends to compare its greenhouse gas emission levels with those in 1990. And those numbers do look quite impressive, with a 44% drop in GHG emissions [3]. However, these are production based emissions and if we take into account the emissions from products consumed in the UK then that figure would be higher. For example, in 2014 the UK had a 27% reduction of production based emissions relative to 1990, but this figure is only 11% if you consider the consumption stats [4]. If that same ratio holds in 2017 (the most up to date data we have available currently), then that would be equal to only a 18% reduction of consumption based emissions.

Example of steel: A brief history of decline and future opportunity

As stated above, over the past 30 years the UK economy has gone through radical changes, during which many carbon intensive industries have reduced dramatically in size. Many of the associated emissions have been exported to other countries, such as China. One example of this is the steel industry, which is one of the single largest industrial GHG emitters responsible for 7-9% of all global GHG emissions [5].

The UK’s journey from cradle of the industrial revolution to post-industrial country is well trodden and the steady decline of the prominence of the UK steel industry follows that same path. Whilst the UK produced 29 million tonnes of steel in 1970; the UK produced only 8 million tonnes of steel in 2016. This contrasts steeply with China which produced 808 million tonnes in 2016 [6], over a million tonnes of which (in 2015) was destined for the UK [7].

Increased exporting of UK’s steel emissions

There are no exact emissions figures for the UK steel industry, from either imports or exports, but we can use the amount of steel produced as a proxy for greenhouse gas emissions. In 1990, the UK was a net exporter of steel (exporting approximately 1 million tonnes of steel more than it was importing) [8], whilst today the UK is a net importer of steel (with a deficit of approximately 3.1 million tonnes) [9]. Thus, the UK’s role has flipped and an increasing proportion of the greenhouse gas emissions relating to the production of steel for the UK market are now the responsibility of other countries. However, greenhouse gasses are still being produced regardless of where the steel mills are located, and changes must to be implemented in the steel industry in order to reduce them. These are changes that will require investment.

Green steel technology: future investment opportunities?

In order to meet various climate goals, we must decarbonise the steel industry over the next 30 years. This will require new technology and approaches to the steel industry, but this is also an opportunity to repatriate the steel industry and its associated carbon emissions. So what technologies can replace the current carbon intensive steel manufacturing process?

Currently huge volumes of coal and natural gas are used to turn raw iron oxide into raw iron, which is then converted to steel. There are a plethora of different technologies, all at different stages of maturity, which can mitigate or entirely reduce the huge volumes of greenhouse gasses involved in this process. For example:

Improvements to the circular steel economy – Mature Technology – increased reuse and recycling of steel products [10]

Electric arc furnace – Mature Technology – Uses electric current to melt and process new and recycled steel – carbon free if renewable electricity sources are used
Direct reduction of iron ore with hydrogen – Demonstration Level – a carbon free method of creating raw iron [11]
Molten oxide electrolysis – Developing Technology – Carbon free if renewable electricity sources are used [12]

These technologies are at various stages of their life cycles, but have the potential to seriously cut the amount of greenhouse gasses emitted by the industry and are worth looking out for in the future. In addition, there would be other benefits of investing in domestic versions of these new technologies. For example, locating the plants in the UK would bypass the need for shipping and its associated emissions, as well as providing skilled employment for local communities.

Summary

The UK’s assertion that greenhouse gas emissions can fall with economic growth is valid, but the extent is exaggerated.
Many of these increases in economic growth have been associated with increasing offshoring of British manufacturing.
The associated emissions of products consumed in the UK but produced elsewhere are not included in the UK’s emissions data.
There may be future investment opportunities for the repatriation of these industries whilst investing in new cleaner technologies.

References

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