The double damage of offshoring industry and the implications for UK SMEs

Offshoring of production of UK goods has had a damaging effect on British industry and increased global carbon emissions. The implications are stark for the next decades, as SMEs depend on the decisions made on taxation regarding carbon emissions and carbon consumption considerations.

Twin allies: Natasha Engel, Shale Gas Commissioner 2018-2019 and Greta Thunberg of Extinction Rebellion fame. From different ends of the red hot debate on climate change, they both understand that offshoring of carbon emissions may polish politician’s green credentials but it does not reduce global emissions.

Offshoring carbon emissions has already had a significant effect on UK business, big and small. And climate change policies are about to be unveiled. How should business leaders respond?

Competitiveness concerns are here and real

The impact of offshoring

Both Engel and Thunberg have stated that the 43% reduction in UK greenhouse gas emissions promoted by the Committee on Climate Change and the Department for Business, Energy and Industrial Strategy since 1990, was actually nearer a 8% decline in carbon consumption if offshoring of British industry is included. 

Engel attributes the closure of Redcar Steel Mill in Teesside with the loss of 2,000 jobs and the replacement of British coal with a five-fold increase in imported Russian coal to offshoring to countries with higher carbon emissions and no carbon taxes (1).Contrary to popular belief, the majority of our energy is used in transport and manufacturing, not electricity generation – the only sector where emissions reductions are typically promoted.

The cost of climate change

In my oil spill control company, the cost of the climate change levy contributed to our ceasing in 2011 an energy-intensive drying and production process of absorbents from by-products of the nappy and paper industries. We now import from China and Turkey. 

No doubt this pattern of offshoring of carbon emissions has been repeated by thousands of other companies throughout the UK.

Offshoring results in higher carbon emissions. China, despite signing the IPCC Paris Agreement, regards coal as a strategic fuel and will continue building coal-fired power stations and increasing its emissions at least until 2030 (4) at a far higher carbon footprint than generation in the UK.  And liquified natural gas (LNG) which will need to be imported from the USA and Qatar to meet our gas requirements for the next several decades, has far higher carbon emissions than home produced gas. LNG needs to be cooled to minus 168 degrees and shipped in refrigerated tankers before regassification in the UK – an energy intensive process. 

Currently, UK manufacturing companies pay the EU ETS price of around £20 per tonne of carbon emitted. Power generators also pay a ‘carbon price support’ giving them a total bill of around £38/tonne. Offshore supplies of all the imported goods from countries like China and India pay no carbon taxes.

Implications for business

An influential report from the LSE recommends that a move to a net-zero emissions target will require a price of £50 per tonne of carbon dioxide in the UK by 2020 for manufacturing and therefore a price of £68 per tonne for power generators.

Critically, their recommendations are restricted to carbon emitters, not to consumption. They qualify their report by saying: “For selected trade-exposed sectors, support measures may have to be strengthened to protect their international competitiveness, including perhaps border carbon adjustment. However, competitiveness concerns will abate as more and more countries move to a net-zero trajectory.”

This is not my experience running a business – competitiveness concerns are here and real. China, for one, has no net zero trajectory until after 2030. The implications for small business in the UK depend crucially on the decisions made on carbon taxation and climate change policy more widely.

If in the new Energy White Paper carbon taxes are massively increased in 2020 only on territorial emissions, then SME’s need to intensify their search for competitive imports from states (China, India and the USA) with low cost energy.If the new energy White Paper levies carbon taxes on carbon consumption, great opportunities will arise for reshoring industrial production as high emission, imported goods and LNG can be viably replaced by home produced goods and energy, including gas.

Sources:

  1. Natasha Engels in the Times 28thJune 2019
  2. Climate change: Is Greta Thunberg right about UK carbon emissions? By Rachel Schraer BBC Reality Check 26 April 2019
  3. Department for Business, Energy & Industrial Strategyhttps://www.gov.uk/government/statistics/energy-trends-june-2019
  4. Leslie Hooke, Financial Times 22ndSeptember 2019
  5. http://www.lse.ac.uk/GranthamInstitute/wp-content/uploads/2019/05/GRI_POLICY-REPORT_How-to-price-carbon-to-reach-net-zero-emissions-in-the-UK.pdf

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