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Outsourcing: implications in a globalized world

Outsourcing: implications in a globalized world

The Magic Nexus team

In this issue we look at the role of outsourcing in European industry. The question is, what role does outsourcing play in the effectiveness of EU policies to reduce greenhouse gases emissions, promote renewable energies, increase recycling and reduce environmental impact of agriculture?

Industrial and agricultural production are often outsourced to countries with lower production and labour costs, and the impacts of these activities are externalised along with production. Outsourcing may be the direct result of policy decisions, such as when a country exports its toxic waste, or may be a secondary effect of decisions taken at firm level, such as relocation driven by labour costs and tax reliefs. Outsourcing is also referred to as displacement by Dryzek (1987), and externalisation, with reference to the concept of externalities in economics (the consequence of an industrial or commercial activity which affects other parties without this being reflected in market prices).

Due to the difficulty of keeping track of externalized activities, they are difficult to measure and are often kept hidden from public view. For example, efforts to increase recycling may not lead to the desired results, as there is little information on what happens to exported waste. In our first article, we explore the question of waste outsourcing by taking China’s recent ban on plastic waste imports as an example. Waste exports draw attention to the fact that waste disposal is costly, requiring a high level of energy and labour resources.

In the case of energy, the challenge is dependence on energy imports. While energy imports are often analysed in terms of energy security, we argue that from a nexus perspective imports also imply outsourcing the production of inputs which are particularly “costly” in terms of resources or labour requirements.

In the case of water, we use the water footprint approach to show how trade of agricultural commodities also implies trade of “virtual water” used to produce fruits and vegetables. The trade of virtual water flows is of interest within Europe, as water-scarce Mediterranean countries are the main exporters of fruits and vegetables to Northern European countries.

These articles are aimed at initiating a discussion on the importance of outsourcing for the study of the nexus. We welcome any comment and contribution to the discussion. You can either use our discussion forum or write to us.

References:

Dryzek, J.S. 1987: Rational ecology: environment and political economy. Oxford: Basil Blackwell

What if Europe had to process its own waste?

What if Europe had to process its own waste?

Tessa Dunlop and Zora Kovacic

A great deal Europe's waste is exported to the Global South, including electronic, chemical and incinerator waste. Despite recent policy action to reduce plastic waste, the EU still plans to export a significant amount of plastic to other countries. But what if  Europe did not export any waste at all?

In the case of plastics, the EU generates a whopping 25.8 million tonnes of plastic waste per year, with packaging making up 40%. Most of this packaging waste (70%) is either incinerated or sent to landfill, with less than 30% collected for recycling. But almost half of the plastic packaging material collected for 'recycling' is sent to third-party countries - the exported plastics are included in the official recycling rate. While plastics packaging cannot be seen as a representative study of other types of exported waste, it is a worthwhile sector to analyse given recent policy announcements by the EU.  The EC is updating its plastic strategy following the announcement by China in late 2017 that it would ban imports of single-use plastics, including from the EU.

So why is collected waste sent far overseas?

Because it is still cheaper to do so than to process it in Europe. Labour costs are higher in Europe, and the high fragmentation of collection and sorting means that high-quality recycling is difficult to perform cheaply at scale. Not to mention a great deal of collected material is of 'poor' quality, meaning that it has been contaminated by food or other substances. Contaminated waste materials are difficult to recycle and require intensive treatment to produce high quality recyclates. Furthermore, the manufacturing processes (injection, extrusion, blow moulding, thermoforming, etc.) can differ significantly depending on the product-specific requirements that define the resistance, weight and aesthetic aspects of the product.

The performance of sorting and recycling varies greatly from country to country, as do the commitment pledges to improve waste recycling and sorting practices. Recycling targets have generated some controversy in the European Parliament, as many of the Eastern European countries are reluctant to face the high costs of recycling given their limited relative contribution to waste generation. Returning to the case of plastic waste, in 2014 five countries generated approximately 70% of Europe's plastic packaging waste – namely Germany, Italy, the UK, France and Spain. Only Germany in 2014 was close to reaching a 55% recycling target. France, on the other hand, has the lowest performance – even though it is responsible for approximately 13% of the total EU generated waste.

So how is the EU responding to China’s ban on plastic waste?

  • The Circular Economy Package aims to increase packaging recycling to 70% by 2025. But this ambitious target may be watered down, especially under pressure from the plastics industry. Plastics Recyclers Europe has commissioned a study showing that a 55% recycling target can be achieved by 2025, or by 65% if extra exports are included.

  • In 2017 the EC also proposed a new plastics package to ensure that all plastic packaging is reusable or recyclable by 2030.  

  • Recycling does not mean that waste is processed. Slovenia for example has one of the highest recycling rates in Europe and also one of the highest waste export rates. The EU imposed legislation to reduce landfilling to less than 10% of waste output by 2030 – which has been a successful strategy in Germany to increase the recycling performance – but risks increasing incineration rates if measures aren't imposed on this practice too. Waste processing methods are not mutually exclusive and may generate trade-offs.  

  • Calls have also been raised to place a tax on single-use plastics, although it is expected to be politically unpopular. Also, this would only tackle one waste stream, ignoring the considerable amount of non-plastic waste generated including construction and energy waste.

While China's import ban is expected to lead to a significant reduction of the extra-EU exports, it is assumed that exports of plastic packaging waste will remain at half their 2014 level (50%)  to countries including Malaysia, Indonesia and Vietnam, according to the Plastics Recyclers Europe study. There is little information about what happens to this waste after it is exported, as it is costly to monitor.

MAGIC diagnosis: waste outsourcing is a question without a straight answer.

Waste in general (not just plastic packaging) is difficult to monitor, measure, keep track of and dispose of. Measurements are more easily available for specific waste streams (such as plastics, electronic equipment, construction waste, food waste) than for total waste. Policies break waste down by each waste stream, and sometimes classify waste by economic activity. As a result, it is difficult to get an overall picture of how much waste is produced and discarded. How relevant is it to focus on plastics? According to a recent report published by the European Commission (European Commission 2018), plastics represent less than 3% of material flows.

Secondly, how should waste be measured? By weight, construction materials contribute to about 35% of total waste in the EU-28 (European Commission 2018), but other factors are also important: e.g. the proper disposal of hazardous substances is needed to avoid health and environmental hazards, and the recovery of rare earth metals may be an important measure against scarcity and price fluctuations. When the quality of materials contained in waste is taken into consideration, measurements may change from relative quantities to chemical properties.

Third, there may be blind spots in waste management. While many initiatives - not least in the Circular Economy Package - deal with recycling, reuse & repair, eco-design, waste prevention and sharing economies, the issue of waste outsourcing is not mentioned. The issue of outsourcing points at the fact that waste management is not just a matter of individual behaviour or recycling methods, but is linked to the way economic activities are organised. The question “What if Europe didn’t export any waste?” requires a complexity-based approach that takes into account the ramifications of economic activities, including the interdependencies with foreign trade. 

References:

Deloitte. 2018. Sustainability Blueprint for plastics packaging waste: Quality sorting & recycling
<http://www.plasticsrecyclers.eu/sites/default/files/PRE_blueprint%20packaging%20waste_Final%20report%202017.pdf>

PlasticsEurope, 2015. Plastics 2015 – An analysis of European plastics production, demand and waste data
<http://ec.europa.eu/environment/circular-economy/pdf/plastics-strategy.pdf>

The World Bank Group, 2012. WHAT A WASTE. A Global Review of Solid Waste Management
<https://siteresources.worldbank.org/INTURBANDEVELOPMENT/Resources/336387-1334852610766/What_a_Waste2012_Final.pdf>

European Union, 2015. Waste Shipment data.
<http://ec.europa.eu/trade/import-and-export-rules/export-from-eu/waste-shipment/>

European Commission, 2018.  Commission Staff Working Document - Measuring progress towards circular economy in the European Union – Key indicators for a monitoring framework.
<http://ec.europa.eu/environment/circular-economy/pdf/monitoring-framework_staff-working-document.pdf>

What if healthy diets had a hidden cost?

What if healthy diets had a hidden cost?

Violeta Cabello & Tarik Serrano

Europe consumes around 200 million tonnes of fruits and vegetables (F&V) annually, which is about 12% of the total biomass consumed in our continent. This volume has steadily increased over the last decades, a consumption pattern that is a sign of the healthier and richer dietary habits and lifestyles of Europeans. However, these habits need to be met with increased production, which is not feasible everywhere. Contrary to other crops such as cereals or tubers, most F&V require high irrigation levels and warm weather conditions for growing. This is the reason why most of F&V production in Europe is located in Southern European countries which also tend to have conditions of lower water availability. Therefore, the increase of F&V production is usually associated with impacts in water resources availability and aquatic environments, challenging the water management in these regions.

The fact that northern European F&V consumption is to a large extent sustained by southern countries' production is nothing new. We have recently witnessed the empty sections of vegetables in UK supermarkets due to weather vagaries limiting the supply capacity of Spain. However, how much water are they saving thanks to the externalized production? Let’s look at the two major importers, UK and Germany. Whereas Germany imports only 36% of the F&V it consumes, it saves an amount of water equal to 23% of the total water used for irrigation in agriculture in the country. The UK is even more impressive: 60% of F&V consumed within the country are imported, accounting for 34% of the total water used in agriculture in the country (meaning that 12 times more water is imported virtually than used for F&V production within the country!). If these countries were to produce what they consume, they would have to either significantly increase their water availability, or take it from other uses. Both alternatives have trade-offs.

How does the picture look like in their mirror countries, the net exporters? Well, 36% of F&V production in Italy is exported and in Spain it reaches up to 52%. This trade is translated into 4,125 million cubic meters of water exported virtually from those countries, a share of 14% of the total water used for irrigation. Whereas the share might not look dramatic at the national scale, there is a sharp contrast when looking at regional differences with most production concentrated in water scarce areas. For instance, the arid province of Almeria in Spain exports virtually around 85% of the water it uses, causing a heavy impact on the already strained local aquifers.

The conundrum is that neither Northern countries can produce what they consume because of climatic constraints, nor can Southern countries maintain their production patterns if they want to manage their water resources sustainably. It is not surprising then that European policymakers face a huge challenge in harmonizing water and agricultural policies to solve this nexus problem.

 

What if energy imports mattered?

27 March 2018

What if energy imports mattered?

Maddalena Ripa & Louisa Jane Di Felice

During the past few hundred years, growing numbers of people have obtained their energy from further and further afar, and supply has become inextricably linked to distant locations and events, expanding the spatial and temporal chain linking energy supply to demand. This is particularly true of oil, but also of all the other energy sources that can be moved across borders: coal, electricity, natural gas, and nuclear fuel (Overland, 2016). In 2012, the EU imported 53% of all the energy it consumed, at a cost of more than €1 billion per day. Looking at energy imports reveals how the decline in energy use per unit of GDP (i.e., Economic Energy Intensity) in EU advanced economies is not necessarily because they have become much more efficient in terms of energy and resources use, but because they increasingly rely on other countries to fulfil their supply of primary energy sources. Energy makes up more than 20% of total EU imports - a fifth of the EU's total import bill (European Commission, 2018). Implicit in the import of energy products is the indirect import of labour and resources, such as water and primary energy sources, embodied in the production process and transport of these products.
 

Specifically, the EU imports:

  • 88% of its crude oil
  • 66% of its natural gas
  • 42% of its solid fuels
  • less than 4% of its renewables (mostly concentrated on biomass)
  • 95% of its uranium
     

If we consider embodied fossil energy imports (also known as ‘virtual imports’), as for example the oil embedded in the import of diesel, the gap between fossil energy consumption and production (one traditional measure of energy security) in the EU is even larger than commonly assumed. This has prompted the MAGIC project to investigate the narrative of energy security as a nationally bounded imperative.
 

Figure 1. Percentage of fossil primary energy sources outsourced abroad – direct import in orange and virtual import in dark red
(DE – Germany, ES – Spain, FR – France, IT – Italy, NL – Netherlands, RO – Romania, SE – Sweden, UK – United Kingdom). More details available in MAGIC Deliverable 4.2.

MAGIC research has shown that the percentage of fossil primary energy sources directly and indirectly outsourced is higher than 80% in all most EU countries: Figure 1 shows the percentages of outsourced fossil primary energy sources, including coal, oil, gas produced outside the country, directly and indirectly required (virtual) to produce the total energy metabolized by UK, Sweden, Romania, Netherlands, Italy, France, Spain and Germany. 

Misrepresenting the share of inputs sourced from foreign suppliers can introduce a significant bias in the analysis. Indeed, the level of outsourcing of economic sectors heavily affects their performance. A country outsourcing the production of inputs that are particularly “costly” in terms of resources or labour requirement may appear more efficient than a country producing its own input.

In the EU, similar to other global economies, pressure for greater energy self-sufficiency is rooted in the narrative of preventing major supply disruptions (European Energy Security Strategy, 2014). This means that broader discourses on the socio-economic implications of the energy globalized trade are systematically ignored.

 

Figure 2. Percentages of working hours employed to produce the energy metabolized (directly and indirectly) by eight EU countries.
The blue part of the bar shows the percentage of working hours employed locally, whilst the red part of the bar expresses the outsourced percentage.

Figure 2 shows the percentage of labour (one key nexus element in MAGIC analysis) that is directly and indirectly required and outsourced (red bar) to produce the energy needed to sustain the country. This percentage is comparatively high and for some EU countries (e.g., Spain and Netherlands) it is higher that the local labour investment. In addition, the missing nexus link is that the EU workers whose job is moved offshore do not stop using energy, even if they become permanently unemployed or retire as a result of the change. And the beneficiary of the job transfer offshore will use more energy, as the accompanying increase in income translates into a standard of living that affords more consumer goods, and possibly a move to lower deinsity housing.

 

Table 1. Origin of oil imports (in %) for selected EU countries
(Regions of origin: RER -Europe , RU – Russia, RAF – Africa, RNA – North America, RLA – Latin America, RMS – Middle East, RAS – Asia and the Pacific)

Labour is an essential but often neglected nexus element that is of paramount importance to study the broader socio-economic implications of EU economies and provide trans-disciplinary insights. For example, Table 1 shows the origins of EU oil imports. The largest share of oil is derived from developing countries, where low income and illegal, low security jobs pose ethical issues that are not adequately tackled by the current EU legislation.

Globalization has demonstrated an unexpected ability ‘to manage the non-resolution of its problems, accommodate its dysfunctions, even drawing renewed strength from this state of affairs’ (Barca, 2017). These side-effects are serious and, if left unchecked, will impose limits on the ultimate extent of globalization's spread. Addressing this will require novel approaches and may result in some counter-intuitive solutions. Through the MAGIC project, our aim is to provide better quantitative framings of the issue at hand, in order to aid decision makers who are confronted with the complex challenges associated with an increasingly globalized world.

 

References

Barca, S. (2017). Labour and the ecological crisis: The eco-modernist dilemma in western Marxism(s) (1970s-2000s). Geoforum, (June), 0–1. https://doi.org/10.1016/j.geoforum.2017.07.011

European Commission, 2018. Press Release. http://europa.eu/rapid/press-release_MEMO-14-379_en.htm

European Commission, 2014. European Energy Security Strategy [COM(2014)330]

Overland, I. (2016). Energy: The missing link in globalization. Energy Research and Social Science, 14, 122–130. https://doi.org/10.1016/j.erss.2016.01.009