GLOBAL INTEGRATION AND CARBON FLOW IN EU AND REST OF THE WORLD: A 2-REGIONAL INPUT-OUTPUT FRAMEWORK

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1 GLOBAL INTEGRATION AND CARBON FLOW IN EU AND REST OF THE WORLD: A 2-REGIONAL INPUT-OUTPUT FRAMEWORK Amarendra Sahoo, Arjan de Koning, Reinout Heijungs Institute of Environmental Sciences (CML) Leiden University

2 We appraise carbon flows for EU and ROW due to inter-regional consumptions and productions interdependencies. Domestic production (producer s responsibility) Consumption (consumer s responsibility) Consumer s responsibility when consumption is internalized to generate induced effect A two-regional IO multiplier analysis with different scenario settings

3 DATA BASE EXIOBASE data base on supply-use table for the year countries and one rest of the world. 129 x 129 industry sectors each for EU and ROW. Environmental and material extensions for.

4 METHODOLOGY Carbon flow is evaluated with the help of fossil carbon contents and the Leontief multipliers. Fossil carbon content of product groups is calculated on the basis of mass balance approach along with IO transaction matrix (Heijungs et al, 2012). An activity requires products as well as environmental extraction, e.g. crude oil, gas etc. for its use and may have emissions containing fossil carbons, e.g. CO 2, CO and CH 4.

Product 1 Carbon product supply Carbon product

5 CARBON CONTENT OF A PRODUCT: MASS BALANCE APPROACH Emissions to environment Environment al extraction Product 1 Carbon product supply Carbon product inputs Product 2 Carbon product supply Emissions to environment

6 Carbons contents of products( Kg C/Million Euro) Source: Heijungs et al. (2012) EU ROW Industry x Industry Industry x Industry Coal and lignite, peat Crude petroleum Natural gas Other petroleum, gaseous materials Coke oven products Motor spirit (gasoline) Kerosene, kerosene type jet fuel Gas oils Fuel oils n.e.c Petroleum gases, other gaseous Other petroleum products Chemicals, chemical products Manufacture of gas; distribution of gaseous fuels Retail sale of automotive fuel

7 METHODOLOGY(CONTD.) Carbon contents are calculated by combining monetary input-output transaction matrix along with physical satellite account containing emissions and resource uses, and carbon contents of the environmental extensions. We Calculate carbon flows applying the carbon contents on IO transaction matrix for EU and ROW. Two-regional IO linked by intermediate demand and final demand flows (trade link).

8 CARBON CONTENT AND CARBON FLOW IN EU AND ROW N N S EU Production ROW Production S From production to final demand EU Final Demand ROW Final Demand

9 TWO-REGIONAL EXTENDED IO TABLE Two-regional IO table is modified to link factor income and consumption of the economy in order to account for induced effects. Ind1 EU Ind2 EU Ind1 ROW Ind2 ROW Consump - tions EU Consump - tions ROW Investment EU Investment ROW TOTAL Production Account (EU) Ind1 C EE1 C ER1 N EE1 N ER1 Y1 Ind2 C EE2 C ER2 N EE2 N ER2 Y2 Production Account (ROW) Ind1 C RE2 C RR1 N RE1 N RR1 Y3 Ind2 C RE2 C RR2 N RE2 N RR2 Y4 Income (EU) V E1 V E2 Y5 Income (ROW) V R1 V R2 Y6 Net Savings EU S E Y7 Net Savings ROW S R S RE Y8 TOTAL Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8

10 SCENARIOS Scenario 1: Production- based carbon flow based on IO transaction matrix (direct flow) Scenario 2: Consumption-based carbon flow based on direct, indirect inter-industry demand by activities for EU and ROW Scenario 3: Consumption-based carbon flow based on induced consumption for EU and ROW

11 SCENARIO 1: PRODUCTION- BASED CARBON FLOW BASED ON IO TRANSACTION MATRIX

12 SCENARIO 2: CONSUMPTION-BASED CARBON FLOW Based on direct, indirect inter-industry demand by activities for EU and ROW (Proops et al, 1993; Papathanasopoulou, 2005). Fossil carbon directly or indirectly embodied in one unit of final production: We arrange with respect to exogenous demand and Leontief inverse matrix.

13 SCENARIO 2 (CONTD.)

14 SCENARIO 2 (CONTD.) For EU: For ROW: 1. Fossil carbon flow with production of goods in EU to meet demand in EU:

15 SCENARIO 2 (CONTD.) 2. Fossil carbon associated with production of exports goods in EU to meet final demand for imported goods from ROW: 3. Fossil carbon flow associated with industries in ROW that are imported to meet intermediate demand in EU destined for final demand: 4. Fossil carbon flow associated with industries in ROW to produce final goods that are imported by EU to meet imported final demand.

16 SCENARIO 2 (CONTD.) Similarly we can define the components for ROW. Production and consumption based carbon flows for one region will be equal if we adjust and rearrange the components in the consumptionbased accounting. Carbon flow for EU and ROW on the basis of production:

17 SCENARIO 3: CARBON FLOW BASED WITH INDUCED CONSUMPTION we conduct the same exercise as in scenario 2 But we internalize the economy s consumption vector for both EU and ROW in the IO matrix by closing the leakages of value added income. Investment demands along with change in stocks become the final demand vectors. A matrix has now additional column and row vectors

18 SCENARIO 3 (CONTD.) Multiplier equation is written as: Split the final demand vector into 2 columns

19 SCENARIO 3 (CONTD.) Ignoring the last two rows and premultiplying the equation with the diagonal matrix of fossil carbon contents for EU and ROW:

20 OBSERVATIONS: SCENARIO 1 EU is responsible for million tonnes while ROW is for million tonnes, over 6 times more than EU s carbon flow Carbon flow due to direct EU consumption from ROW (both intermediate as well as final consumption) is million tonnes, while for ROW from EU, it is only 93 million tonnes (7 times) The production based carbon flow is mainly from the industry demand for the production activities (73% for EU and 78% for ROW)

21 OBSERVATIONS: SCENARIO 1 (CONTD.) 93% of carbon associated with domestic production in EU is due to its domestic consumption purpose and almost the same percentage in case of ROW. Highest contributor fossil carbon products: EU: coal, lignite, peats ; `gas oil ; motor spirit ROW: crude petroleum ; coal, lignite, peats

22 OBSERVATIONS: SCENARIO 2 Carbon flow associated with overall EU consumption is million tonnes and for ROW is million tonnes (almost 4 times higher) Difference in consumption-based and production-based carbon flow is on account of inclusion of embodied trade flows. Carbon flows associated with direct and indirect EU consumptions produced in ROW is million tonnes and ROW consumption produced in EU is million tonnes (around 4 times)

23 OBSERVATIONS: SCENARIO 2 (CONTD.) 82% of the carbon flow from goods produced in EU to meet domestic consumption in EU and 90% for ROW. Carbon flow associated with the production to support domestic consumption for ROW is almost 96% of its total accounted consumption-based carbon flow and only around 4% is due to import demand from EU; 56% and 46% respectively for ROW. Carbon products responsibility: ROW to EU: mainly crude oil (499 mil.tonnes) EU to ROW: gas oil, coal; lignite, peats ; crude oil

24 OBSERVATIONS: SCENARIO 3 Noticeable decline in carbon flow from goods produced in EU to meet final demand in EU (58%) compared to earlier scenarios; 86% for ROW Carbon flows associated with production in ROW to support consumptions in EU is 1218 million tonnes and it is 570 million tonnes for ROW (higher than earlier scenarios) Both the regions share the responsibility of fossil carbon flow if analysis based on induced consumption.

25 OVERVIEW Production based fossil carbon flow: EU carries huge responsibility through imported products from ROW Consumption perspective analysis reduces the responsibility of domestic production in contributing to fossil carbon flow while assigning increasing responsibility to consumption EU s contribution of carbon flow in trade is the maximum due to its import consumption of crude petroleum, followed by natural gas and coal, lignite, peats.

26 Table 5: Top ten activities with respect to carbon flows Scenario1 Scenario2 Scenario3 EU ROW EU ROW EU ROW 1 Coke oven products Electricity by coal Coal, lignite, peat Coal, lignite,peat Coal, lignite, peat Coal, lignite, peat 2 Electricity by coal Motor spirit (gasoline) Coke oven products Natural gas Coke oven products Natural gas 3 Motor spirit (gasoline) Fuel oils n.e.c. Motor spirit (gasoline) Motor spirit (gasoline) Motor spirit (gasoline) Motor spirit (gasoline) 4 Fuel oils n.e.c. Coke oven products Gas oils Electricity by coal Gas oils Electricity by coal 5 Gas oils Gas oils 6 Kerosene, jet fuel Electricity by gas Electricity by coal Kerosene including kerosene type jet fuel Other petroleum Coke oven products Electricity by coal Petroleum gases Other petroleum Coke oven products 7 Petroleum gases and others 8 Other petroleum Petroleum gases Other petroleum Petroleum gases,other Fuel oils n.e.c. Fuel oils n.e.c. Gas oils Kerosene, jet fuel Fuel oils n.e.c. Fuel oils n.e.c. Gas oils 9 Electricity by gas Manufactured gas Crude petroleum Petroleum gases Crude petroleum Petroleum gases 10 Manufactured gas Nuclear fuel Natural gas Crude petroleum Natural gas Crude petroleum

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