WIOD Conference on Industry-level Analyses of Globalization and its Consequences – Vienna (Austria) 26 - 28 May 2010
1
Joint Research Centre (JRC)
Underestimation of the performance
of the EU CO2 emission reductions
via external trade
José M. Rueda-Cantuche* (Jose.Rueda-Cantuche@ec.europa.eu)
IPTS - Institute for Prospective Technological Studies
Seville - Spain
* The views expressed in this paper belong to the authors and should not be attributed to the European Commission or its services
1. Background
WIOD Conference on Industry-level Analyses of Globalization and its Consequences – Vienna (Austria) 26 - 28 May 2010
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Main issues are related to
sustainable production and consumption:
• the identification of the most polluting activities;
• the identification of which products consumed
by final users are the most environmentally
harmful;
• The distinction between domestic vs. embodied
emissions (multiregional IOA and international
databases crucial).
WIOD Conference on Industry-level Analyses of Globalization and its Consequences – Vienna (Austria) 26 - 28 May 2010
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(a)This paper provides an alternative (and rather
more complementary than exclusive) measure
of the performance of the European Union (or
any country at hand) in reducing its carbon
dioxide emissions via external trade.
(b)this paper will provide a ratio of performance
that measures at the industry level how far the
current productive structure of an economy is
from its maximum polluting capacity with a given
domestic technology.
WIOD Conference on Industry-level Analyses of Globalization and its Consequences – Vienna (Austria) 26 - 28 May 2010
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(c)This approach is perfectly in line with Leontief's
(1953) approach, the main purpose of which is
to compute not the labour/capital consumption
of the rest of the world, but the labour/capital
saved by the US through imports.
(d)Our purpose will be to estimate the carbon
dioxide emissions saved by the EU through
imports and not to compute the emission
intensity of the rest of the world.
WIOD Conference on Industry-level Analyses of Globalization and its Consequences – Vienna (Austria) 26 - 28 May 2010
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(e)It seems sensible to take for granted the domestic
technology assumption for the reduction in
emissions by the EU through imports. Otherwise,
imported products should have been produced
domestically.
(f) This approach may be criticised for not being too
realistic, but this would be true only if we wished to
measure international emissions, which is not the
purpose of this paper.
(g)Dietzenbacher and Mukhopadhyay (2007) and
Rueda-Cantuche and Amores (2010).
WIOD Conference on Industry-level Analyses of Globalization and its Consequences – Vienna (Austria) 26 - 28 May 2010
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(h) This paper will also prove that the standard
measures available in the literature would
underestimate the ratio of performance and thus,
would assign the EU less amounts of exported
air emissions (carbon dioxide) on average.
(i) In addition, another advantage of this approach
is that all the data needed to make the
calculations are ready to use worldwide at many
countries’ National Statistical Institutes websites.
2. Methodological framework
WIOD Conference on Industry-level Analyses of Globalization and its Consequences – Vienna (Austria) 26 - 28 May 2010
To our knowledge, the IO type of analysis used so far
by LCA and industrial ecology practitioners is based
almost exclusively on the Leontief quantity model
(Dietzenbacher, 2005) and the multipliers obtained
through the so-called Leontief inverse.
→ By changing the quantities of a mixed bundle of products consumed
by final users, the Leontief quantity model yields variations in
industry outputs (considering industry by industry tables).
→ Emission coefficients provided generally by LCA practitioners
and/or NAMEA can be eventually used to determine the change in
emissions caused by the initial variation in final demand.
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WIOD Conference on Industry-level Analyses of Globalization and its Consequences – Vienna (Austria) 26 - 28 May 2010
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Emission multipliers have been reported in a number of
studies for different countries (Germany, United Kingdom,
Sweden, Australia, Japan, Netherlands, New Zealand and
Spain, among others) either in a single- or multi-regional
IO framework.
•
•
•
•
•
•
•
Proops et al (1993)
Östblom (1998)
Lenzen (1998) and Lenzen et al. (2004)
Gerilla et al (2001)
Haan (2001)
Creedy and Sleeman (2005)
Serrano and Roca (2007) …
WIOD Conference on Industry-level Analyses of Globalization and its Consequences – Vienna (Austria) 26 - 28 May 2010
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Stochastic input-output analysis
*
While these studies provide environmental impact estimations, to our
knowledge, IO-LCA practitioners have paid little attention to the
POSITIVE and SIGNIFICANT BIAS of the multipliers derived
from the Leontief inverse (Dietzenbacher, 2006)
→ Assuming stochastic technical coefficients (A) leads to a
positively biased Leontief inverse (Simonovits, 1975…)
→ All separate positive biases accumulate in the projection for the
output levels since the Leontief inverse is post-multiplied by an
exogenously specified (positive) final demand vector.
→ Hence, overestimation is not a negligible issue at all
(Dietzenbacher, 2006)
WIOD Conference on Industry-level Analyses of Globalization and its Consequences – Vienna (Austria) 26 - 28 May 2010
* Might be more economically plausible to
assume stochastics on the IOT values rather
than on the input matrix A? (Dietzenbacher,
2006)
→ Yes, but it is rarely adopted (Gerking,
1976, 1979; and Dietzenbacher, 1988)
due to the rather complex stochastic
nature of the input coefficients induced
by the transformation from IOT to A.
* But IOTs are derived from SUTs! So why
stop there at IOTs and not use SUTs ?
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WIOD Conference on Industry-level Analyses of Globalization and its Consequences – Vienna (Austria) 26 - 28 May 2010
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* A similar exercise was already carried out by
ten Raa and Rueda-Cantuche (2007) but with the supply
and use (firms) data used to compile official SUTs.
→ Regression coefficients of a single-equation
econometric model turned out to be (output,
employment, emission…) input-output multipliers
under the product technology assumption.
→ Consistent and unbiased employment/output
multipliers; confidence intervals; hypotheses testing.
Positive bias confirmed for the majority of multipliers.
→ Limited data availability.
WIOD Conference on Industry-level Analyses of Globalization and its Consequences – Vienna (Austria) 26 - 28 May 2010
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Contributions
* To our knowledge, we present the first combined use
of econometric modelling tools within a supply-use system to
address environmental repercussions (CO2 emissions) from
changes in quantities consumed by final users.
→ This approach provides one-shot unbiased and consistent
estimates of CO2 emission multipliers on the basis of
official SUTs (note that this differs slightly from the
approach based on firms data).
→ Minimal requirements for IO-LCA practitioners: SUTs at
basic prices; data on direct emissions; and standard
econometrics.
WIOD Conference on Industry-level Analyses of Globalization and its Consequences – Vienna (Austria) 26 - 28 May 2010
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EEIOA
SUT
Econo
metrics
Put together
for the very
first time to
analyse CO2
emission
coefficients
Performance of
CO2 emission
reduction via
external trade
Confidence
Empirical
intervals
application
3. Econometric CO2 emission multipliers
WIOD Conference on Industry-level Analyses of Globalization and its Consequences – Vienna (Austria) 26 - 28 May 2010
(a) Following ten Raa (2005) and ten Raa and
Rueda-Cantuche (2007) the row vector of
CO2 emission multipliers per commodity
output (γ) is defined as usual:
  c( I  A)
1
where c = row vector of CO2 emission per commodity;
and (I-A)-1 is the standard Leontief inverse.
14
WIOD Conference on Industry-level Analyses of Globalization and its Consequences – Vienna (Austria) 26 - 28 May 2010
(b) Next by assuming the commodity technology
assumption in the sense that carbon dioxide
emission levels of a commodity are
independent of the producing industry, we
denote:
C  cV
T
c  CV
T
being C = row vector of CO2 emission levels by industries;
and V T, the production matrix of the supply table at basic
prices (commodity by industry)
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3. Econometric CO2 emission multipliers
WIOD Conference on Industry-level Analyses of Globalization and its Consequences – Vienna (Austria) 26 - 28 May 2010
(c) Similarly, the construction of the A matrix
under the product technology assumption is
given by:
U  AV
T
A  UV T
being A = matrix of technical coefficients (product by
product); U, the intermediate part of the domestic use table
at basic prices (product by industry); and V T , the production
matrix of the supply table at basic prices (product by
industry)
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3. Econometric CO2 emission multipliers
WIOD Conference on Industry-level Analyses of Globalization and its Consequences – Vienna (Austria) 26 - 28 May 2010
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Bearing in mind the former assumptions,
  c( I  A)
1
becomes into:
  CV
T
I  UV 
T 1

 C I  UV
T
V 
T 1
which can be expressed as:
C   (V  U )
T

 C V U
T

1
3. Econometric CO2 emission multipliers
WIOD Conference on Industry-level Analyses of Globalization and its Consequences – Vienna (Austria) 26 - 28 May 2010
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Now, it’s time to introduce econometrics by
adding a random disturbance error.
C   (V  U )  
T
Requirement: enough degrees of freedom for estimation
Nr explanatory variables (n) = Nr rows in (V T-U) → Nr products
Nr observations (m) = Nr elements in row vector C → Nr industries
Nr degrees of freedom = m - n
Rectangular oriented approach!!!
C1
C2
Cm  
Direct
emissions
V


C
 1
2
n
 x11
x
 21


 xn1
T
U 
x12
x22
xn 2
Multipliers


x1m 
x2 m 



xnm 
e1
e2
Errors
Net output
em 
WIOD Conference on Industry-level Analyses of Globalization and its Consequences – Vienna (Austria) 26 - 28 May 2010
Suppose the simplest case of one
economy with just one single sector,
x  zd  zm  y
zd
x  ad x  z m  y , ad 
x
zm  y
zm
y
x


(1  ad ) (1  ad ) (1  ad )
x
1

y (1  ad )
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WIOD Conference on Industry-level Analyses of Globalization and its Consequences – Vienna (Austria) 26 - 28 May 2010
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Suppose c0 the amount of CO2 emitted per
unit of product output,
c0
x
c0

y (1  ad )
 d  cI  Ad 
1
WIOD Conference on Industry-level Analyses of Globalization and its Consequences – Vienna (Austria) 26 - 28 May 2010
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Suppose zm = 0, hence zd = z; all imports
were to be produced domestically,
c0
x
c0

y (1  a)
  cI  A
1
WIOD Conference on Industry-level Analyses of Globalization and its Consequences – Vienna (Austria) 26 - 28 May 2010
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Since a is expected to be always greater
or equal than ad, then:
1
1

(1  a) (1  ad )
cI  A  cI  Ad 
1
 d
1
WIOD Conference on Industry-level Analyses of Globalization and its Consequences – Vienna (Austria) 26 - 28 May 2010

= maximum polluting capacity (per
one-unit increase in final demand
quantities) of an economy. If all
imports were to be produced
domestically, it yields how much
CO2 emissions were to be increased
to reach the maximum level of
emissions for a given domestic
technology !!
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WIOD Conference on Industry-level Analyses of Globalization and its Consequences – Vienna (Austria) 26 - 28 May 2010
d
= measure of the actual polluting
capacity (per one-unit increase in
final demand quantities) of an
economy. Not all imports were to be
produced domestically!! It is
expected to be benchmarked by 
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4. Performance of emission reductions…
WIOD Conference on Industry-level Analyses of Globalization and its Consequences – Vienna (Austria) 26 - 28 May 2010
Subsequently, we propose the following ecoperformance ratio (P):
d
P  1

where P gives an idea of how far is the current productive
structure of an economy from the maximum emission levels
per unit of output that can be achieved (P=1) with the current
domestic technology. As long as:
•
P ≈ 1: the corresponding industry is benefitting from the
external trade to reduce its emissions.
•
P ≈ 0: the contrary applies; (e.g. no external trade).
For example, let γd be equal to 5 tonnes and γ be equal to 10 tonnes (P=1/2), then EU imports of such
commodities allow EU to be at the 50% of its maximum polluting capacity per unit of output.
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WIOD Conference on Industry-level Analyses of Globalization and its Consequences – Vienna (Austria) 26 - 28 May 2010
A  UV
26
T
Ad  U dV
T
d
P  1

C   (V  U )  
  c I  A
C   d (V Ud )  
 d  cI  Ad 
T
T
1
1
5. Data and results
WIOD Conference on Industry-level Analyses of Globalization and its Consequences – Vienna (Austria) 26 - 28 May 2010
Empirical application to EU27 (2000)
(a)Data sources: direct CO2
emissions (Eurostat); first EU27
aggregated IOT (dom + imp) for 59
industries and 59 products (RuedaCantuche et al., 2009) and an
aggregated EU27 supply table at
basic prices (Eurostat).
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5. Data and results
WIOD Conference on Industry-level Analyses of Globalization and its Consequences – Vienna (Austria) 26 - 28 May 2010
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Empirical application to EU27 (2000)
(b) Construction of the model:
* Calculation of the row vector (C) of CO2 emission
levels by industries (1 x 59) and the use table at basic
prices assuming the PTM for domestic and total uses.
* Aggregation of the 59 columns (regarding products)
of the supply and use tables into 21 ad-hoc pollutantwise relevant groups of commodities (according to
their shares over the total European emissions of
CO2)
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WIOD Conference on Industry-level Analyses of Globalization and its Consequences – Vienna (Austria) 26 - 28 May 2010
Domestic direct emissions (percentage)
29
Domestic direct emissions (percentage)
45,0%
40,0%
35,0%
30,0%
25,0%
20,0%
15,0%
10,0%
5,0%
0,0%
WIOD Conference on Industry-level Analyses of Globalization and its Consequences – Vienna (Austria) 26 - 28 May 2010
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WIOD Conference on Industry-level Analyses of Globalization and its Consequences – Vienna (Austria) 26 - 28 May 2010
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WIOD Conference on Industry-level Analyses of Globalization and its Consequences – Vienna (Austria) 26 - 28 May 2010
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WIOD Conference on Industry-level Analyses of Globalization and its Consequences – Vienna (Austria) 26 - 28 May 2010
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WIOD Conference on Industry-level Analyses of Globalization and its Consequences – Vienna (Austria) 26 - 28 May 2010
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WIOD Conference on Industry-level Analyses of Globalization and its Consequences – Vienna (Austria) 26 - 28 May 2010
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Comparison P(L) vs P(E):
PL  0.09
PE  0.14
35 %
(a)By using the Leontief inverse, one is closer to the
maximum polluting capacity (P is lower) than it should
be.
(b)Hence, we are underestimating the actual performance
of the EU in reducing its CO2 emissions via external
trade.
WIOD Conference on Industry-level Analyses of Globalization and its Consequences – Vienna (Austria) 26 - 28 May 2010
d
*
d  t
The role of import shares in the
eco-performance ratio (P):
C
B
C
A
B
 d0
36
A
s 1
s0
s  s1
s  s0
s
WIOD Conference on Industry-level Analyses of Globalization and its Consequences – Vienna (Austria) 26 - 28 May 2010
(a)Sectors with large import shares but low
value of P (when large Ps are expected):
• Fishing
• Textiles
(b) Sectors with small import shares but large value
of P (when small Ps are expected):
• Other services
• Construction
37
6. Conclusions
WIOD Conference on Industry-level Analyses of Globalization and its Consequences – Vienna (Austria) 26 - 28 May 2010
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(a) IO economics and industrial ecology (LCA) are increasingly becoming a
part of government efforts to quantify national and global environmental
impacts of sustainable production and consumption strategies (e.g. EU).
(b) Hence, the extensive use of the Leontief quantity model and the Leontief
inverse deserves some further thinking on the stochastic limitations
(positive bias) derived from the IO literature.
(c) This paper proposes therefore a new combined approach with three main
advantages:
→ Improvement of the accuracy of the environmental impacts
assessed by industrial ecologists;
→ Finding of a way to compute unbiased and consistent IO
multipliers for the IOA community;
→ Relegate the use of IOTs in favour of SUTs (easily available),
thus avoiding the use of the Leontief inverse.
WIOD Conference on Industry-level Analyses of Globalization and its Consequences – Vienna (Austria) 26 - 28 May 2010
39
Joint Research Centre (JRC)
Underestimation of the performance of the
EU CO2 emission reductions via external
trade
Comments, more than welcome!!
José M. Rueda-Cantuche* (Jose.Rueda-Cantuche@ec.europa.eu)
IPTS - Institute for Prospective Technological Studies
Seville - Spain
* The views expressed in this paper belong to the authors and should not be attributed to the European Commission or its services