CEPMLP – University of Dundee
1
Introduction
2
EU–15 Annual Carbon Emissions by Sector
3
Kyoto Protocol and the EU Emissions Target
4
EU–ETS : Mechanism and Operations
5
Methodology : The Input – Output Model
6
Results and Interpretation
7
EU-15 Energy & CO2 Intensity
8
Environmental Impacts
9
Conclusion
10
Comments & Questions
Examining the Environmental Impact of EU ETS: an Input Output Approach - Lawan Usman Ali
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Global warming is defined as an increase
in the Earth’s temperature and is triggered
by a rise in greenhouse gas emissions.
Most of the world’s emissions
are attributed to mankind’s
large scale use of fossil fuels
Burning fuels such
as Coal, Natural Gas,
& Oil Produces GHGs
to the atmosphere
in excess amount.
Leading to Climate Change
manifestation – Increase harsh
weather conditions, damaging
storms, drought & other Global
Warming Effects that cause increase
economic & health problems for both
man & animals
Examining the Environmental Impact of EU ETS: an Input Output Approach - Lawan Usman Ali
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Fig. 1: EU – 15 GHGs Emissions by Sector (2008)
EU - 15 GHG Emissions by Sector (2008)
Waste
3%
Others
17%
Agriculture
10%
Energy
29%
Transport
21%
Fig. 2: EU – 15 GHGs Emissions by Gas Type (2008)
EU - 15 GHG Emissions by Gas Type (2008)
Nitrous Oxide
7%
Others
2%
Methane
8%
Manufact &
Const
13%
Carbon
Dioxide
83%
Industries
7%
Agriculture
Manufact & Const
Others
Energy
Transport
Industries
Waste
Data Source: European Environment Agency (EEA)
In 2008, Energy Sector is the highest emitter of
GHGs with 28%. Followed by Transport 21%
while Manufacturing, Agriculture and Industries
have 13%, 10% and 7% respectively. Waste had
3% & Others 17%.
Carbon Dioxide
Methan
Nitrous Oxide
Others
Data Source: European Environment Agency (EEA)
The greenhouse gas most commonly produced by our
activities is carbon dioxide (CO2) & is responsible for
63% of man-made global warming. In 2008, CO2
emissions was responsible for 83% of GHGs
Emissions in the EU–15 while Methane, Nitrous
Oxide & Others recorded the balance 8%, 7% & 2%
respectively
Examining the Environmental Impact of EU ETS: an Input Output Approach - Lawan Usman Ali
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 Kyoto Target: - The EU 15 member states has a Kyoto target to reduce
their GHGs emissions by 8% in the period 2008-2012 compared to its base
year (1990) level.
Fig. 3: Trends in EU GHGs Emissions Compared to 1990/Base Yr
110
105
100
95
90
87.30
85
EU-15 Total GHGs
Emissions
Agriculture
Energy
Industries
Manufact & Const
Transport
Waste
Others
Total Emissions
80
75
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
70
Index base year =100, EU-15
EU-15 Total Greenhouse Gas Emissions
Emission
Reduction
1990
2009
(1990-2009)
441.171 378.864 -14.123095
1167.319 1061.136 -9.0963139
352.882 250.285 -29.074025
635.828 453.142 -28.731984
693.74 809.987 16.7565659
183.67 112.411
-38.7973
790.301 657.889 -16.754629
4264.911 3723.714 -12.689526
The emission level in the 'base year' is the
starting point for tracking progress of
domestic emissions for EU-15. The base year
is a calculated emission level from which
emission
reductions
will
take
place
(4,247,409). In practice, EU-15 base-year
emissions can be considered close to 1990
emissions. The EU-27 does not have a Kyoto
target.
Data Source: European Environmental Agency (EEA)
Examining the Environmental Impact of EU ETS: an Input Output Approach - Lawan Usman Ali
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 Emissions trading: - market based scheme for environmental improvement
that allows parties to buy and sell permits for emissions or credits for
reductions.
 EU Emissions Trading Scheme: - The EU ETS was launched in 2005 and is the EU's
climate change policy tool which helps industries to cut their CO2 emissions. The
EU ETS is considered a central instrument for reaching the EU-15 target under
the Kyoto Protocol.

Under the scheme, large emitters of CO2 are under an obligation to report their annual CO2
emission and to return an amount of emission allowance that is equivalent to their CO2
emission in that year. On the other hand, if an emitter is able to reduce its CO2 emissions then
it is allowed to sell its emission credit and make a profit.

The EU ETS currently covers more than 10,000 installations with a net heat excess of 20 MW
in the energy and industrial sectors which are collectively responsible for close to half of the
EU's emissions of CO2 and 40% of its total greenhouse gas emissions.
The EU ETS aims to promote reductions of GHGs emissions in a cost-effective and
economically efficient manner. The system operates through the allocation and trading
of greenhouse gas emission allowances throughout the EU. One allowance represents one
tonne of carbon dioxide equivalent.
Examining the Environmental Impact of EU ETS: an Input Output Approach - Lawan Usman Ali
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Mechanism: -
The trading mechanism consists of
matching emission buyers and sellers and then settling them
by depositing a valid allowance in exchange for the agreed
financial consideration. Just like the Stock Market,
Companies and individuals can trade using brokers who are
listed on the exchange.
Allocation: -
EU – ETS
Mechanism &
Operations
• Free Allocation: An overall 'cap', is set by each Member
State on the total amount of emissions allowed from the
installations covered by the system. The allowances are
then distributed by Member States to the installations in
the system.
• Auctioning: From 2013 emission allowances will be traded
on a common auction platform, this will replace the free
allocation of allowances generally followed in the first
(2005-2007) and second (2008-2012) trading periods.
Pricing: -
The actual carbon price is determined by
market fundamentals – i.e too many allowances will result in
a low carbon price and Vice Versa. For Instance, the average
price of carbon was €22/tCO2 in the second half of 2008 but
decreased to €13/tCO2 in the first half of 2009.
Examining the Environmental Impact of EU ETS: an Input Output Approach - Lawan Usman Ali
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Examining the Environmental Impact of EU ETS: an Input Output Approach - Lawan Usman Ali
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EU ETS
PHASE
Level of the cap
Coverage
Allocation rules
At discretion of Members
States but there is
common characteristics:
• Auctioning is little used
• Strong reliance on recent
historical emissions
• Expected shortage is
allocated to the power
sector
• New entrant/closure
provisions is made
At discretion of Members
States but there is
common
characteristics:
• Auctioning is little used
• Strong reliance on recent
historical emissions
• Expected shortage is
allocated to the power
sector
• New entrant/closure
provisions benchmarked
• Fully harmonised across
Member States
• No free allocation for
power
generators
• 80% free allocation for
other sectors in 2013
declining to zero in 2020
unless identified as
exposed to carbon leakage
• 5% of the allocations set
aside for new entrants
Phase1
(20052007)
Sum of caps in each
country’s NAP based
on negotiating
processes between
Member State
governments and the
European Commission
playing the role of
“enforcer of scarcity”.
• CO2 only
• Power stations, ferrous
metals production,
cement, refineries, pulp
and paper, glass and
ceramics, and all
combustion facilities
>20MW and some opt-outs
• 42% of the European
emission
Phase 2
(20082012)
Sum of caps in each
country’s NAP aimed
at respecting Kyoto
targets and governed
by European
Commission “antisubsidy” rulings that
prevent allocation
exceeding.
• CO2 with some N2O
emitting facilities opt-in
• Sectors: As of phase 1
without opt-outs. Some
combustion facilities
below 20 MW opt-in
• Air travelling is proposed
for inclusion in 2011 or
2012.
• Possibly the maritime
emissions related
Phase 3
(20132020)
Cap calculated for
Europe as a whole
decreasing by
1.74%/yr from phase
2 average annual
allowances starting in
2010 and aimed to
deliver 21% emission
reduction in 2020
compared to 2005
level and continue
thereafter at the same
rate with a review in
2025
• CO2, nitrous oxide for
acid production and
PFCs for aluminium
• Additional sectors:
non-ferrous metals, rock
wool, gypsum, various
chemicals, CCS related
emissions
• Combustion facilities
above 20MW with
harmonized rules and
derogations below 25MW
Auctioning
Kyoto credits
Maximum 5%, (only 4
Member States used
auctioning, mostly to
cover
Administration costs)
CDM and JI allowed
excluding
land use. Member States set
caps on how many
allowances can be imported
Maximum 13.4%
(UK: 7%, Germany: 8.8%)
As of phase 1
90% of the total
allowances
Auctioned revenue is
given
to countries in proportion
to their verified 2005
emissions. The final 10%
is redistributed according
to GDP per capita.
• No international
agreement: CER/ERU
banking from phase 2 under
phase 2
qualifying rules
• International agreement:
New
CER/ERU authorized
limited
to gap half of the effort
between the 20% European
objective of reduction and
the 30% objective.
Examining the Environmental Impact of EU ETS: an Input Output Approach - Lawan Usman Ali
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The input-output analysis was first devised by Wassily Leontief in 1936 to describe how
industries are interrelated through producing and consuming intermediate industry outputs
in an economy.
In matrix notation, the basic equation is
𝔁 = 𝜜𝔁 + 𝛄
Eq. (1)
Where:
𝔁 = the total output required
𝛄 = the final demand/consumption
𝚨 = the matrix of technological coefficient,
that represent the input required by another
sector to produce its monetary output.
Thus, 𝚨𝔁 = the n-vector of intermediate
demand.
𝓍 is given by solving Eq. (1):
𝔁 = (𝚰 − 𝚨)-1 𝛄
Eq. (2)
Where:
Ι denotes the m×m matrix &
(𝚰 − 𝚨)-1 = the Leontief inverse

An environmental extension of the basic
IO model can be obtained by introducing
a q×m matrix B to show the amount of
pollutants emitted to produce one unit
output of each industry.
M = B(𝚰 − 𝚨)-1 𝛄
Eq. (3)
Where:
M = the multiplier matrix which shows the
total direct and indirect pollutants intensity
of each sector.
 The variation of physical units of energy
and CO2 equivalent in final demand is:
m = M𝛄
Eq. (5)
m = total environmental impact produced by
the change in the final demand.
Examining the Environmental Impact of EU ETS: an Input Output Approach - Lawan Usman Ali
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The price rises resulting from carbon emission trading are given by:
P = 𝝁u
Eq. (4)
Where:
u = the energy-related CO2 intensities
μ = the carbon price on CO2 emissions
P = n-vector with the derived carbon price rate on the goods produced.
 Data Preparation

Following the information provided by Eurostat’s ESA 95 input-output tables, the
study analyse 22 producing sectors and six types of fossil fuels (Lignite, Peat,
Lignite Coke, Natural Gas, Liquid Fuels and Diesel Oil) in the EU-15 member
countries.
•
Figures refer to the year 2005 input-output table and corresponding emission data
available for all 15 countries.
•
Primary energy-use by input-output sector referring to 2005, used in the data base
is derived from ESDS/IEA beyond 20/20 web data set (2010 Edition).
•
The ratio of CO2 emissions to fuel use by sector are easily obtained by dividing the
amount of fossil fuel use by the carbon emission from each sector.
Examining the Environmental Impact of EU ETS: an Input Output Approach - Lawan Usman Ali
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CO2 Emissions Intensities by IO sectors and fuel sources.
Examining the Environmental Impact of EU ETS: an Input Output Approach - Lawan Usman Ali
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Price Effect & Environmental Impact of Emissions Trading on the EU 15 Economic Sectors
Examining the Environmental Impact of EU ETS: an Input Output Approach - Lawan Usman Ali
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Examining the Environmental Impact of EU ETS: an Input Output Approach - Lawan Usman Ali
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The study suggests a number of policy adjustments for future
EU climate change policy.
Future policy actions should avoid focusing on the
actual CO2 emitters but instead adopt strategies that
help modify the behaviour of those responsible for
CO2 emissions.
Governments must therefore reach their Kyoto
targets through emission reductions from policies and
measures addressing the sectors not covered by the
EU ETS and/or through flexible mechanisms.
The results also signify the need to improve the
overall efficiency of the EU energy system, and not
only focus on the actual CO2 emitters.
Examining the Environmental Impact of EU ETS: an Input Output Approach - Lawan Usman Ali
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Examining the Environmental Impact of EU ETS: an Input Output Approach - Lawan Usman Ali
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