Linking Environmental Indicators with Economic Data (work in progress) Andreas Löschel Sascha...

Linking Environmental Indicators

with Economic Data(work in progress)

Andreas LöschelSascha RexhäuserMichael Schymura

Centre for European Economic Research, Mannheim Germany

WIOD Conference, Wien, 26th – 28th May 2010

Table of Contents1.Introduction

2.Environmental Indicators

3.Econometric Analysis

4.Additional Indicators


1. Introduction

Work Package 7 of the WIOD Project:

Impact of globalization and structural change on environmental issues

Linking environmental indicators with economic data, using:

Panel data econometrics

Structural Decomposition Analysis (SDA)


WP 7: SDA of indicators: “The change in each indicator is broken down into changes in its consistent parts (

Effects of changes in production technology,

Changes in trade patterns

Changes in consumption patterns

Changes in environmental efficiency at industry level ).“


1. Introduction

Production based indicators: Current Presentation

(Pollution Haven/Carbon Leakage)

Consumption based indicators: Future Work

(Ecological Footprint Analysis)

1. Introduction

On the search of adequate indicators:

The requirements of adequate environmental indicators crucially depend on the central question of research, and on

The method used.

General requirements of environmental indicators: Unambiguous Relevant Measurable Comparability Free of value judgments

see Ebert & Welsch (2004) for a more detailed discussion


2. Environmental Indicators Definitions

Requirements

Choice


2. Environmental Indicators

Definition:

Environmental indicators quantify and simplify information on environmental issues in order to make this information useable and publicly known (Hammond et al. 1995)

Types of indicators:Pressure indicators(i.e. pollutant emissions to the atmosphere)

State indicators(i.e. pollutant concentration within the atmosphere)

Response indicators(i.e. energy intensities)



Pressure Indicators:

We focus on pressure indicators because:

They serve best the criterion of policy relevance of environmental indicators and allow for a comparison of cross-country differences (Hammond et al. 1995)

Data are available from the WIOD input-output tables

The data directly attribute environmental damages to the production process



Addressing the Question of Responsibility of Environmental Pressure:

Producer responsibility accounting(total emissions from resident institutional units)

Consumer responsibility accounting(total emissions from production - exports + imports)

Which accounting scheme is fair?We cannot answer this question precisely without relying on strong value judgments. Lenzen et al. (2007) offers an overview on this debate.



Examples of consumer based indicators:

Ecological footprint, carbon footprint

Material Flow Analysis (MFA) (ecological „rucksack“ indicators)

Total Embodied Material Requirements (TEMR) and Total Material Consumption (TMC)

Life Cycle Assessment (LCA)

Very popular in input-output frameworks



Examples of producer based indicators:

Total emissions of pollutants (per GDP, or per industry output)

Carbonization index

(Energy intensity)

Popular in econometric analysis



Discussion:

The choice of adequate indicators depends on the question of research (globalization and structural change impacts on the environment) and on:

The method used (SDA and panel data econometrics)

SDA: a change in an indicator will be broken down in its consisting parts.

In order to reach the goals of WP 7, constructed indicators like the ecological footprint are not our preferred choice because we are interested in the impact of changes in world trade patterns!


3. Econometric Analysis SDA

Problems and Discussion


3. Econometric Analysis

Introductory Comments:

WP 7 is interested in globalization, structural change and environmental issues.

The econometric implementation of the SDA allows to shed light on this central research question.

WIOD input-output tables provide sectoral disaggregated panel data for all countries.



Structural Decomposition Analysis (econometric approach):

A change in an environmental pressure indicator will be decomposed in its:

Scale effect

Technique effect

Composition effect

Trade induced composition effect


4 it i2

1 itit 0 i2 it tt

t

3 i

i

tE TI

(REL.INC, REL.KL)

INC INM KC L

Source: own construction following Antweiler et al. (2001) and Cole & Elliot (2003)


Scale Effect

How do total pollutant emissions change due to an increase in national economic activity?

Technique and composition effect are held constant.

The scale effect can be measured by using a country’s GDP, income or total output.


1 itINC


Technique Effect

How do total pollutant emissions change due to a change in production technologies (i.e. triggered by environmental regulation)?

Composition and scale effect are held constant.

The technique effect is measured by most authors (Antweiler et al. 2001, Cole & Elliott 2003, and many more) by relying on the environmental Kuznets Curve relationship as a proxy for technological progress.

Thus, GDP per capita is a measure for the technique effect.

Remember that GDP is also used to measure the scale effect!

Thus, it is difficult to distinguish between scale and technique effect


21 it 2 itINC INC


Composition Effect

How do total pollutant emissions change due to a shift in the mix of industries within an economy?

Technique and scale effect are held constant.

The composition effect can be measured by using capital-to-labor ratios as an indicator of the mix of dirty and clean industries within an economy.

This requires the assumption that capital-intensive industries have higher pollution or energy intensities.


3 itKL


Trade Induced Composition Effect

How do total pollutant emissions change due to a shift in the mix of industries within an economy relative the world’s average?

Or in other words: is there an “outsourcing” of dirty industries to other countries (Pollution Haven Effect)?

Technique and scale effect are held constant.

The trade induced composition effect can be measured by using relative capital-to-labor ratios and relative incomes.

Why is relative income needed in addition to relative capital-to-labor ratios?(relative) income is a proxy-variable for environmental stringency, further details later!


4 it it

it

TI

(REL.INC, REL.KL)


Problems of this approach 1/2:

The Kuznets Curve relationship is used here as a proxy for environmental stringency to measure the technique effect

The EKC method has some crucial requirements (Antweiler et al. 2001):

indicator (or pollutant) should be a by-product of goods production

by-product should vary across industries

should be subject to regulation

well known abatement technologies for this special pollutant should be available

The pollutant should have strong local effects

Thus, possible indicators are SO2 and NOx, but not CO2!



Problems of this approach 2/2:

Endogeneity between:

The volume of trade flows and economic growth (GDP)(Frankel & Rose 2005, Frankel & Romer 1999) Use of instrument variables like distance, land area, etc.

The stringency of environmental regulation and trade flows (and political economy problems of trade policy)(Ederington & Minier 2003) time dummies and/or instrument variables for unemployment, union membership, etc.



Short Summary:

The standard empirical pollution haven approach limits the choice of environmental indicators (local pollutants: SO2, NOx).

Problems for employing global pollutants (EKC relationship is an inappropriate measure of the technique effect).

Use of instrument variables necessary.

SDA is only useful by applying pressure indicators and the producer accounting principle.


4. Additional Indicators Dynamics of Indicators


4. Additional Indicators

Mobility Indices

Here we want to shed some light on the time dynamics of environmental indicators.

Appropriate indicators for this analysis are for instance response indicators like relative energy intensities by industry or country.

This allows us to compare different countries or industries and sheds some light on technological progress.


4. Additional Indicators

The Shorrocks-Index

Introduced by Shorrocks (1979)

Needs rearranging of the data into transition matrices P (transition probabilities) for a transition from one time period to another.

Environmental indicators have to be classified into n groups (i.e. relative energy intensities from 90-80%, 80-70%, …)

The index for the amount of dynamics (not the direction) has the form:

A graphical illustration can be given by using Salter-Curves (Salter 1960) or Kernel-Density-Estimators.


n trace(P)M(P)

n 1

5. Conclusion


5. Conclusion

Our work is focused on production based indicators.

We pronounced the preliminary state of this paper, final results will be presented in Amsterdam (December 2010).

Currently no data from the WIOD project.

SDA combined with mobility indices will give substantial insights into the effects of economic development on environmental indicators.


Thank you for your attention !


Linking Environmental Indicators with Economic Data (work in progress) Andreas Löschel Sascha...

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