Post-industrial countries like the UK import an increasing fraction of their manufactured goods from China. The carbon emissions from the Chinese factories making these goods are not included in the UK’s totals. How much greater would the UK’s emissions be if we included the impact of goods manufactured in China?

In this article, we make some estimates based on a briefing note recently produced by the Tyndall Centre. The numbers I use are imprecise – and I am using them for reasons not envisaged by Tyndall – but I believe that the increase in the imports of Chinese goods has probably reduced UK emissions by about 6% below what it would have been. Perhaps more dramatically, the trade deficit is rising so fast that it is depressing UK emissions by a further 2% a year.

Without the safety valve of Chinese imports, the UK would be very likely to breach its Kyoto targets, which only measure domestic emissions. This is important in itself, but a more striking conclusion is that the trade with China has disguised a failure to cut emissions growth below the growth of British GDP. The UK government, and others around the world, regularly claim that CO2 output has been ‘decoupled’ from economic growth. The analysis contained in this note suggests that the apparent decoupling is actually an artefact of the growing deficit in trade with China.

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When a country imports goods or services, the emissions are carried on the account of the exported country. International trade shifts the location of greenhouse gas emissions.

Most rich countries are now sourcing a large fraction of their manufactured goods from Asia. The shift to China and other countries is tending to reduce European and American emissions and increase those of Asia.

The Tyndall Centre recently produced a briefing note which concluded that the enormous Chinese trade surplus was responsible for about 1,100m tonnes of greenhouse gases in 2004. This is about 4% of the world total. Put another way, China’s trading partners would have greenhouse gas emissions figures 4% higher if they included the carbon ‘embedded’ in the goods that they bought. As the China trade surplus increases, the percentage of the developed world’s emissions that are being transferred to the east is growing every year.

The impact on the UK carbon emissions account
The UK runs a large and rapidly increasing trade deficit with China. The figures for the last eight years are shown in the chart below. The most recent numbers suggest that the deficit may rise to over $16bn this year.

The UK’s trade deficit with China

Let’s take the numbers for 2006. A £12.3bn net deficit (exports of about £3bn and imports of about £15bn) is equivalent to about 1% of UK GDP. If the trade were typical of the UK economy as a whole, having £12.3bn of economic activity in another country would therefore have reduced UK emissions by about 5m tonnes.

But the material we import from China isn’t typical of the UK economy. It is heavily concentrated on manufactured goods, which will usually have a very much higher carbon footprint than the economy as a whole. By moving our manufacturing to China, we are having an impact on emissions far greater than the share of Chinese imports in our economy.

There is also a second effect. Chinese energy efficiency is much lower than in the West. It takes far more electricity or coal to manufacture Chinese goods than it does in the UK. If we stop making something in the UK and transfer production to China we will add to the total emissions produced by the manufacturing process, increasing global emissions. Of course this will change as China improves its factories but at the moment the country uses about twice as much energy as Western nations per unit of output. We cannot be absolutely certain about this figure but the Chinese steel industry acknowledges that it uses twice the energy to make a tonne of steel as a typical Western plant. The International Energy Agency produces an estimate that similarly suggests that a dollar of Chinese GDP produces twice as much carbon dioxide as in the UK.

We can use the Tyndall Centre figures to estimate the impact of using Chinese factories to make our manufactured goods, though with a substantial range of uncertainty. Tyndall looked at the makeup of Chinese exports and estimated the typical greenhouse gas intensity of the major categories, such as machinery or textiles. The work isn’t precise and the researchers don’t pretend otherwise. But the conclusions seem reasonable and so I use their raw numbers to make estimates of the impact on the UK.

In 2004, was China responsible for about 5m tonnes of greenhouse gases per £1bn of exports. Imports into China from the rest of the world were much less energy intensive and the Tyndall researchers suggest that £1bn of imports were produced with only 1.35m tonnes of carbon dioxide equivalent.

The impact on Chinese emissions from its trade with the UK*

* Assumes £1 = $2.

So the 2006 trade between the two countries resulted in emissions of approximately 78m tonnes in China and 5m tonnes in the UK giving a net balance of almost 74m tonnes, or about 12% of UK emissions.

But if the Chinese goods had been made in the UK, they wouldn’t have been accompanied by 78m tonnes of CO2. If Chinese energy efficiency is about half the UK’s, then the cost would have been about 39m tonnes, about 6% of the national total.

Broadly speaking, the net impact of 2006 trade between the two countries is as follows:

Buying from China reduced UK emissions in 2006 by about 39m tonnes. This is about 6% of today’s greenhouse gas emissions. Final figures for 2006 have not been released, but the country is currently about 2.5-3% below its Kyoto target. I think we can be reasonably confident that the increasing trade deficit with China, which has risen from about £2bn in 1999 to over £12bn in 2006, has kept the UK from breaching its Kyoto obligations.

The deficit with China is growing at about £4bn each year. According to the figures above, the likely impact of this is to reduce UK emissions by nearly an additional 2% a year. Even without this effect, the UK’s emissions are edging upwards. If we included our extra trade with China, we would be seeing a rate of emissions growth very similar to the UK’s GNP growth rate. This forces us to face a serious issue: we have simply not yet decoupled GDP growth from CO2 output. Our use of energy is growing as fast as national income. The growth is disguised by the burgeoning trade deficit with China.

Innocent, the company with one of the purest brands in the UK, has made a mistake. For the last year it has used a new material called PLA for one of its ranges of drinks. It admitted last week that it would cease to use this bio-plastic later this year. But on its website it was still making some surprising claims. It says that the bottles made from this bio-plastic break down in garden compost heaps. They will not. PLA needs to be heated for several days to temperatures far greater than those in a domestic compost bin before it begins to rot. The bottles would break down in a commercial composter, but very few local authorities operate one of these plants. Innocent’s ethical consumers are going to find a large number of plastic bottles at the bottom of their compost heap next spring.

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The company says that in households without compost bins the bottles should be recycled along with other plastics. Unfortunately, this is another mistake. Recycling companies need to separate the different types of plastics so that reprocessing companies can melt them down and recreate the original plastic for re-use. Innocent’s PLA bottle looks and feels like a conventional soft drink container made from a plastic called PET. An Innocent bottle dropped into the plastic recycling box at home will eventually be sorted into a batch with Coca-Cola bottles made from the ubiquitous PET. The PLA will contaminate the batch, and may result in the reprocessor being unable to sell the plastic. PLA comes from the US, and recycling companies there have persuaded the bottling industry not to use the corn-based material in order to maintain the purity of recycled PET.

Innocent has also mistakenly said that the new plastic is ‘carbon neutral’. The plastic manufacturer does indeed stress that its product has a small carbon footprint compared to a conventional oil-based plastic. NatureWorks, the company that makes PLA in the heart of the corn belt, buys all its electricity from wind farms. However the company certainly does not claim that the farms that grow corn avoid the use of fossil fuels. Growing corn needs large amounts of fossil fuel-based fertiliser. Farmers use diesel fuel to run their tractors and ship the grain to the factory. Greenhouse gas emissions from producing corn are substantial. Innocent didn’t look carefully enough at the manufacturer’s slightly ambiguous claims on this issue. A boast that a product is ‘carbon neutral’ is rarely true and perhaps Innocent should have been much more sceptical before it made its own claims.

No one doubts Innocent’s genuine commitment to running its business to the highest ethical standards. It was one of the first companies to decide not to ship its ingredients by air. The company’s ethical sourcing principles are an example to others. 10% of its profits go back to charities in countries where its fruits come from. It has even tested the idea of putting a carbon label on one of its premium products. Its pristine brand image is one of the reasons why it can charge a king’s ransom for a litre of pulped fruit.

Using PLA for its bottles will have seemed an excellent way of keeping ahead of its competitors. Innovation is always risky, and no one can blame Innocent for its enthusiasm in experimenting with a new plastic being aggressively sold by its American manufacturer. It has only ever used PLA in a small fraction of its ever-expanding range of colourful drinks and the damage to its brand will be very limited. Nevertheless, it will make consumers a little bit more wary of trusting Innocent’s claims. A reputation for taking green issues seriously is increasingly valuable. Once lost, ethical credentials will be costly to rebuild.

There is another strange thing about Innocent’s use of PLA: it is made from genetically modified corn. None of us are privy to Innocent’s market research, but I would guess that its most devoted customers are anxious middle-class mums trying to get their children to eat more fruit. In my experience, people like this have a strong visceral distrust of GM foods. Why did Innocent decide to put its ethically sourced and highly nutritious foods in a container made from a substance its customers would strongly reject? And why did the company decide not to tell shoppers of its decision? For a business like Innocent, the green ethic has to run through everything it does and for once its high standards slipped.

The Peak Oil question is beginning to become a central part of the daily debate on energy matters. On one side is an increasing number of independent scientists and oil engineers who note that world oil production is barely rising. Existing fields are running down and new reserves are found rarely. On the other side of the debate are the major institutions of the global oil industry. The International Energy Agency sees world oil supply rising from about 88 million barrels a day now to about 116 million barrels in 2030.

This last week saw another analysis (from Germany’s Energy Watch Group) suggesting that world oil production actually peaked in 2006. From now on, the group says, we can expect rapid declines. Many people worried about climate change see Peak Oil as a good thing. They believe that a shortage of oil and natural gas will slow down the rise in energy consumption and therefore help reduce greenhouse gas emissions.

The argument is actually more complex – it may well be that Peak Oil will tend to increase CO2. We will not be saved from ourselves by running out of oil.

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The Peak Oil debate
First, some facts that nobody disagrees with:

• A large part, perhaps a majority, of the recoverable oil in the Earth’s crust has already been extracted. The CTO of Chevron, a company not known for its pessimistic utterances, particularly about oil supply and climate change, recently said that we have used 1.1 trillion gallons and only a further 1 trillion could be extracted with current technologies.
• Most large oil deposits have already been found. We probably will never see a new field the size of the main Saudi Arabian field. Today’s discoveries are smaller, usually very much smaller. It is taking more and more exploration effort to find fewer and fewer fields.
• The world oil industry is finding it more and more difficult to maintain this growing exploration drive. Oil drilling equipment is in short supply (and one drilling rig is typically likely to find far fewer barrels a year than it did twenty years ago). Oil engineers have an average age of 51 and few people are being trained to replace them.
• The growth in the expenditure on oil exploration is largely ‘illusory’ (source: IEA). More money is being spent, but it is being consumed by rapid cost inflation and the need to work in ever more arduous environments.
• We are consuming more than we are discovering.
• Any future production increases will have to be concentrated in the OPEC countries or Russia. No other oil provinces are likely to produce substantial amounts of new oil. Everybody agrees that non-OPEC oil provinces are already in decline.
• The oil companies have been able to maintain an apparent stability in the volume of unused world reserves by upgrading their estimate of extractable oil each year, not from new discoveries.

The key differences between the Peak Oil proponents and the sober institutions of the world energy industry are few but stark:

• Peak Oil people say that Saudi Arabia is pumping almost as much as it can. Optimists like the IEA say it can continue to grow its output for several decades. Of the 28m extra barrels of oil a day that IEA projects for 2030, over 8m comes from the Kingdom.
• Both sides make similar remarks about Iran, Venezuela, Iraq and Russia. The pessimists say that these countries aren’t discovering oil and their main fields are near decline. The mainstream forecasters say that they can grow.
• Around the world there are huge resources of low-grade oil in the form of shale or sands. The most important may be in Canada. Peak Oil people say that these resources are extremely costly to exploit and require unprecedented amounts of water to extract the oil. In the case of the Alberta oil sands, there simply isn’t enough water anywhere near the oilfields to process more than a very small fraction of the oil every year. The conventional view in the oil industry is that the oil sands are within our reach.

The oil market – now pushing at unprecedented price levels of more than $80 a barrel – is giving a clear signal. Clearly, short-term traders see no relief in sight to the extremely tight world oil market.

Where is the climate change angle?
The International Energy Agency sees total world energy demand growing by over 50% by 2030, with greenhouse gas output rising by a slightly larger figure. A new forecast is due in the next few days and the rumour mill is suggesting that the IEA will increase its projections for 2030, throwing climate change worriers into deeper gloom.

The IEA sees oil output rising slightly less fast than energy use as a whole. Oil use is expected to rise by about 35% by 2030. Of course, if the Peak Oil people are right, emissions from the burning of oil are likely to stabilise or fall. This looks like good news for the atmosphere. It is actually more complex than might appear:

• If the Peak Oil hypothesis is right, we can expect further huge increases in the price of oil. True, this will add to the incentive to extract every last barrel from depleted fields. But it will not alter the fact that no large fields remain. So the high price of oil will not be followed by a surge in new supply.
• High oil prices haven’t yet restrained consumption of oil by any significant amount. US oil purchases have continued to rise even as the price spikes. The rest of the industrial world, partly protected by the fall in the dollar, has seen growth rates not dissimilar to GNP growth rates. All the evidence is that the demand for liquid fuels is extremely price inelastic. After all, there is no easy substitute for petrol or diesel.
• So the price may stay high. Many countries subsidise fuel prices, or hold them down through regulation. The recent Burmese riots were driven partly by increases in the price of fuels. Higher fuel prices threaten social stability, even in oil-producing countries. In Iraq, for example, higher oil prices aren’t getting transferred to the urban poor in the form of higher incomes. But they are feeling the impact at the petrol pump. High oil prices mostly benefit the elites. Eventually the poor will revolt, possibly threatening the supply of oil to the outside world. If Iran were to collapse because of uprisings from the urban masses, world oil prices would go yet higher.
• Paradoxically, perhaps, this isn’t good news for climate change. Increasing transport fuel prices increase the incentive to convert other fossil fuels into liquids. Coal can be turned into a motor spirit. It is only economic at high oil prices, but it is perfectly technically feasible. The Nazis and the boycotted South Africans did it. It is extremely greenhouse gas intensive – probably doubling the climate change cost of a litre of fuel.
• Second, high petrol prices will encourage states to develop crash programmes for biofuels. Temperate biofuels save only a small amount of fossil fuel, since so much energy needs to go into fertilisers and processing the biomass. So the emphasis is likely to be on tropical biofuels. We can expect to see faster and faster rates of deforestation as land is cleared for grains and oil plants. The net effect of this deforestation is disastrous for CO2 emissions as the felled trees give up their sequestered carbon to the atmosphere.
• The third major impact of very high oil prices is on the viability of extracting oil from unconventional sources. The world’s shales and oil sands hold large volumes of oil – perhaps as much as remains in conventional fields. In Alberta, development may be held back by a shortage of water, but any processing of oil sands uses large amounts of energy (largely to produce hydrogen for a chemical reaction to upgrade the oil and make it usable). Extracting oil from sands makes the carbon cost of the oil at least as bad as coal and significantly worse than conventional oil.

The net effect of the continued high oil prices expected by the Peak Oil gang is difficult to predict. The impact may be to hold down world growth, and thus restrain emissions. But it is at least possible that the dominant implication of high oil costs is huge CO2 outputs from processes that turn other fossil fuels into usable liquids. Am I being too pessimistic? Possibly. But the Princeton academics (Socolow and Pacala) who popularised the idea of ‘wedges’ of increased carbon emissions have recently included the conversion of coal to liquid fuels to their list of forces tending to increase global emissions. According to Socolow and Pacala, the large South African synthetic fuel plant is the largest single point of CO2 emissions in the world. The game they have invented for schools envisages 180 similar plants over the next decades. This leads one to the conclusion that these highly respected academics do not think that Peak Oil will be good for climate change.

(Those interested in reading more on the Peak Oil issue should read David Strahan’s superb 2007 book The Last Oil Shock.)