COP26 and the risk of ‘offshoring’ emissions, jobs and investment

Professor Karen Turner

What is offshoring?

Many people may not have heard the term ‘offshoring’, but it is arguably one of the greatest challenges we face, even if COP26 can deliver solid agreement from the nations of the world working to deliver the necessary reductions in global emissions to combat climate change. Basically, ‘offshoring’ refers to outcomes where, rather than reduce emissions at the locations they are currently generated, the impact of decarbonisation or other costs of doing business in these locations causes one or both of two things to happen:

  1. Emitting firms decide to move production operations to other countries where costs are generally lower.
  2. The impact on the price of the output produced causes demand to shift in favour of what is produced in other nations.

Crucially, if (1) and/or (2) happens, unless we change what we consume, one outcome is we switch to importing the goods/services that still cause additional carbon emissions, even though they are no longer on our country’s domestic emissions account.

Why is offshoring a problem?

Well, if global emissions do not actually fall, and may indeed rise (not least given emissions associated with international transportation), we are not addressing the problem of climate change. Moreover, if jobs, investment, and GDP move with emissions, then that will bring real challenges for delivering ‘just transitions’ in the original location of the emissions.

However, perhaps the crucial issue to get in perspective is the fact that if what we consume in our everyday lives continues to rely on production activities that involve emissions, we need to take responsibility for reducing those emissions. One aspect of this is of course being more efficient in what we consume and supporting things like recycling and circular economy developments. But that doesn’t resolve the wider problem: there are carbon intensive products and materials that are not so easy to remove from the supply chains that support our ever day needs, even if we don’t realise it.

A case in point from Scotland

For example, in Scotland, where COP26 will take place within the month, we as a nation delivered one of our biggest step reductions in CO2 emissions when large scale Scottish steel production ended in the early 1990s. However, things that we Scots consume and rely on every day - including our cars, our trains, our fridges and washing machines, and, of course, our renewable electricity generating wind turbines - still have steel somewhere in their supply chains. We just don’t produce that steel or the associated emissions in Scotland anymore. In ‘just transition’ terms (though such terminology wasn’t around at the time), the people who used to work in our steel industry, its Scottish supply chain, and/or the dependent communities (such as the town of Motherwell, just 16 miles from the COP26 venue) don’t have those jobs anymore.

Instead, the steel we ultimately rely on in Scotland is largely produced in other countries, where the emissions and jobs are now located. Surely this can’t be the right sort of outcome in addressing climate change unless, of course, the production and transportation involved now involves less emissions? But, even if that is the case, did this industrial shift constitute a ’just transition’ for the Scottish workforce and communities, such as the village of Ravenscraig that until 1992 was home to one of the largest steel plants in Western Europe, and the neighbouring towns of Motherwell and Wishaw?

The offshoring challenge isn’t going away

As the parties gather at COP26, attention will quite rightly be on securing agreement that each country’s Nationally Determined Contribution (NDC) is sufficiently ambitious and on the climate finance contributions required from more developed nations. However, for a range of very good reasons, the NDCs are set in terms of the emissions generated within each country’s borders, not the global emissions associated with the consumption needs of populations. Individual governments will be keen to achieve emissions reduction ambitions in ways that do not risk jobs and incomes at home, and this is important both in terms of ‘just transitions’ and ensuring the required transitions can be financed by healthy economies.

However, particularly in the absence of effective global carbon pricing, those nations that elect to take important but costly ‘early mover’ steps in reducing emissions associated with globally traded products, may be most at risk from offshoring.

For example, at CEP we’re researching how Scottish industries, including those at the large Grangemouth site in Falkirk may be affected by different approaches to deploying and funding carbon capture and storage, CCS. This is a crucial challenge because, for example, things like petrochemicals production are difficult to remove from our consumption needs because they feed into so many things we use ourselves – including things like the toiletries in our bathrooms – and which others use to help us live healthy lives – e.g., the containers for COVID-19 vaccines.

We find that if a ‘polluter pays’ approach is used to fund CCS in industry, the impacts of higher costs in production at Grangemouth could cause a loss in international competitiveness of Scottish production that leads to job losses at Grangemouth and across Scottish supply chains. However, global emissions won’t fall, because downstream production involving things like petrochemicals to produce what people need/want to consume will simply switch to alternatives produced in other countries. In short, we just offshore our emissions problem and risk the ‘just transition’ ambitions Scotland has set for herself.

What can be done to avoid offshoring?

There are two key aspects to addressing the issue of offshoring and both present challenges to citizens, businesses and government within any nation that needs to genuinely contribute to addressing the global challenge of climate change while ensuring a ‘just transition’ at home.

First, we need to ensure that firms operating in our country do not lose international competitiveness as they work to reduce emissions at their current production locations. This will involve things like ensuring any period where public funding is provided – e.g., through investment support and/or subsidies – is used to build efficiency in emissions reducing processes, perhaps even moving to a situation of competitive advantage in future green markets.

Second, we really need to consider what actions we call for and/or oppose in delivering our own NDC ambitions. The key question must be what is required to deliver our own consumption needs? For example, when we debate issues such as whether to continue our own oil and gas extraction activities, the question centres on whether we can reduce all the consumption that ultimately relies on oil and gas, or whether ending our own extraction activity will simply mean importing more from other nations in the world, without reducing (and potentially increasing) global emissions but sacrificing much-needed jobs and income in the process.