Carbon offshoring — the true face of hypocrisy

The threat of market failures looming in the world necessitates reforms in approach towards ensuring an optimum allocation of resources. Greenhouse gases produced as a result of consumption of fossil fuels create huge negative externalities of production and consumption.

The United Kingdom has indulged in extensive carbon offshoring wherein, the country has drastically multiplied its carbon imports by several folds, and at the same time reduced its coal powered power generation. These externalities create external costs and benefits to the society, where the marginal private benefit is higher than the social benefit and the marginal private cost is lower than social cost. Emissions from the power sector account for a significant proportion of total UK emissions: 31 per cent of total carbon dioxide (CO2) emissions and 26 per cent of total greenhouse gas emissions in 2009. The decarbonisation of the UK power sector is essential to achieving legally binding carbon budgets and to move to a secure and low-carbon energy system.

It can be observed that although UK has made tremendous improvements in decreasing its CO2 production, it has failed to reflect this developement in the consumption side. Between 1990 and 2014, UK domestic CO2 production emissions have fallen 27%. However, more than half of that reduction is offset by imported emissions from other countries, with consumption emissions only declining by 11% over the same period. Countries like UK and USA have also succeeded in substantially pulling down their emissions at the cost of developing countries that have become host to carbon — intensive industries through a systematic relocation strategy. The Office for National Statistics said the UK had become the biggest net importer of carbon dioxide emissions as a result of import of carbon-intensive goods and other raw materials manufactured abroad. Britain has increased its net imports of CO2 emissions per capita from 1.7 tonnes in 1992 to 5.1 tonnes in 2007, offsetting domestic progress on shifting the UK economy away from fossil fuels.

The traditional inventory system and emission recording methodologies do not take carbon imports into account and thus fail to establish the true performance of the company. These factors have led to an exaggeration of the performance of these countries in various climate targets at the expense of third world countries in several intances. CPS pointed out the UK imports six times more electricity than it exports, and is increasingly reliant on power delivered via undersea interconnectors. Although British coal mines have closed, the UK is still importing millions of tonnes from overseas for industrial use, in particular in the steel industry.

It can be clearly seen that the number of people employed in the coal mining indusrty has fallen sharply over the last two decades, from 11% in 2010 to 1% in 2018 . According to the Sheffield Hallam study, former mining communties have been severely affected by the closure of coal mines. This study has found that there is a huge incidence of unemployment in these areas, where there is a reuquirement of providing employment to 80,000 people to raise the natioanl employment rate. The graph accurately portrays the prevelance of a structural unemployment because of the greater focus on renewable energy, coupled with a shift in the focus from coal mining to other knowledge-driven tertiary and quaternary sector.

The country has increasingly relied on domestic carbon price floors to combat the increase in coal powered generation. This has led to massive closures of coal mines in the country but foreign carbon exporters have benefitted at the cost of domestic private companies. These price floors rely on fixing a price above the market-determined equilibrium, and thus bringing down the demand for coal. the CPS argues the practice also discriminates against UK companies which are subject to climate levies, planning and regulatory hurdles that their competitors overseas do not have to face, such as the Carbon Price Floor which taxes emissions. However, the experience of United Kingdom reflects that this market intervention has failed to incentivise low carbon production because the consumers have been forced to pay increasing energy prices, owing to a higher tax incidence on consumers due to the inelastic demand of electricity. In addition, the UK energy market is an oligopoly, with a domination of six firms that have drastically increased energy prices due to higher costs of production, and any attemp to freeze these prices could lead to a cut-throat competition in the intesely competetive industry, reduce profits and increase the frequencies of blackouts in the country.This was implemented by the government to tackle the uncertainity in carbon prices under the EU — ETS. However, these price floors need to adjusted with inflation rates and resisit any pressure from private companies in determining the price floor. This price floor does not differentiate between polluters on the basis of level of pollution, treating all of them equally. This is discouraging for the firms with a lower scale of pollution, who might face huge consquences due to rise in costs of production. The EU-ETS is a testimony to the success of internaltional, market-based climate legislations in lowering the net carbon emissions. As an inherent demirit of cap and trade schemes, this has failed to set a ‘perfect price’ that would disincetivise the carbon usage and encourage switching to less-polluting sources .

The implementation of a carbon border tax is an ideal move to ensure that the ‘real carbon figures’ are taxed and countries fail to exaggerate their status in global statistics on climate change targets.

REFERENCES

  1. IB Economics IA Sample: Microeconomics. (n.d.). Retrieved June 08, 2020, from http://ibeconomist.com/internal-assessment/internal-assessment-sample-microeconomics/
  2. Unpopular but tenacious: A guide to the UK carbon price floor. (2013, November 19). Retrieved June 08, 2020, from https://www.carbonbrief.org/unpopular-but-tenacious-a-guide-to-the-uk-carbon-price-floor
  3. Former mining communities ‘still scarred by past’. (2019, October 16). Retrieved June 08, 2020, from https://www.bbc.com/news/uk-england-50069336
  4. Gourley, P. (2020, March 13). Carbon offshoring ‘hides true UK greenhouse emissions’, says report. Retrieved June 08, 2020, from https://www.scotsman.com/business/carbon-offshoring-hides-true-uk-greenhouse-emissions-says-report-2450354

Student at Kiit International School. Passionate about research in business, political science, current affairs and economics.