LINKING GREENHOUSE GAS EMISSIONS WITH ECONOMIC PRODUCTION AND CONSUMPTION


INTRODUCTION

There are two approaches regularly used to link greenhouse gas (GHG) emissions with economic production and consumption. The production approach measures emissions that are physically produced by industries and households within an economic territory. The consumption approach assigns the territorial emissions to categories of final consumption, then adds emissions embodied in imports, and subtracts emissions embodied in exports. In aggregate the difference between the two approaches will therefore equal the net trade balance of emissions.

The two approaches can generate significantly different results, and therefore represent a significant area of debate within international negotiations on climate change. While consumers often have some choice in their consumption decisions, at times they may lack the necessary constituency to alter producer decisions. Producers may have control over their production methods, but where incentives to move to less environmentally harmful practices do not exist, may be slow to change. As a result, it is well acknowledged that Governments must play a central role in setting and managing emissions trajectories.


PRODUCTION–BASED EMISSIONS FOR AUSTRALIA

Within Australia, the Department of Climate Change is responsible for compiling a National GHG Inventory (NGGI) for the purpose of reporting to the United Nation’s Framework Convention on Climate Change (UNFCCC). Consistent with the production approach, the NGGI records all GHG emissions that are physically generated within a country’s territory. (footnote 1)

In order to align the NGGI data to the macroeconomic indicators produced by the ABS, several adjustments need to be made. These predominately concern emissions of residents abroad, and non–residents in the territory. Examples include emissions associated with international land, water and air transport (footnote 2). Once these changes are complete the compiler has a set of production–based emissions that are consistent and comparable with macroeconomic statistics, including industry gross value added (IGVA) and employment.




Figure 2 shows that in 2008–09, the electricity, gas, water and waste services industry had the highest GHG emissions of any Australian industry (footnote 4), followed by the agriculture, forestry and fishing industry and the manufacturing industry. These three industries together accounted for 74% of emissions, but only 15% of total gross value added and 14% of employment in the Australian economy. Conversely, the commercial and services industries accounted for 70% of all employment and about 62% of gross value added, but only 5% of emissions. In aggregate, production–based emissions for Australia in 2008–09 were equal to 585 mega–tonnes of CO² equivalent (Mt CO²–e).


THE CONSUMPTION APPROACH: GHG INDUCED BY FINAL DEMAND

In order to assemble consumption–based estimates, the ABS can combine its estimates of production–based emissions with ABS Input–Output tables to look at emissions induced through the final consumption of goods and services by Australian households and governments.

For example, the cumulative emissions for the production of manufactured food products – including agricultural production, manufacturing processes, transport and retailing – are attributed to the final consumer. This shifts the focus of the analysis to the demand–side, that is, to the emissions required to satisfy final demand, including emissions embodied in imports. Some brief results of this exercise are presented in figure 3 below.

			Household final consumption	Government final consumption	Investment and changes in inventories	Total consumption based emissions*	Exports
Direct and indirect emissions –
Agriculture, forestry and fishing			13	–	5	19	37
Mining			2	–	5	7	68
Manufacturing
	Food, beverages and tobacco		43	–	1	45	27
	Textile, Wood, paper and printing		6	–	1	7	1
	Petroleum, coal and chemical products		15	2	2	19	12
	Non–metallic mineral products		1	–	–	1	–
	Metal products		1	–	3	4	43
	Machinery and equipment		17	–	34	51	6
Total manufacturing			83	2	41	126	90
Electricity, gas, water and waste services			76	–	19	95	–
Construction			–	–	60	60	–
Transport
	Road		5	1	1	6	4
	Other transport		19	3	–	23	15
Total transport			24	3	1	29	19
Commercial and services			101	36	13	150	13
Total direct and indirect emissions by Final use category			299	42	144	485	228
Direct Emissions by households			46	. .	. .	46	. .
Total direct and indirect emissions Australia			345	42	144	531	228
* Discrepancies between total and components are due to rounding. – nil or rounded to zero (including null cells) . . not applicable.

These experimental estimates show that household demand for the outputs of the commercial and services (footnote 5), manufacturing, and electricity, gas, water and waste services industries were the most significant drivers of Australia’s consumption based GHG emissions in 2008–09.

Note that emissions induced by domestic final demand relate only to those emissions associated with the final consumption expenditure of households and governments, inventory changes and gross capital formation. It includes the emissions embodied in imports. It also includes emissions embodied in intermediate inputs but excludes the emissions associated with that industry output subsequently consumed as an intermediate input by other industries.

For example, the total emissions produced by the electricity generation industry are much larger than emissions induced by its final demand. This is because much of the output of the electricity generating industry is consumed as an intermediate input by other industries and therefore recorded as part of emissions induced by demand for the output of these other industries. Similarly, the transport industry records induced emissions that are less than the total emissions produced by this industry. Finally, direct emissions by households relates to emissions arising from householder’s own transport activities, combustion of gas for heating, petrol used for lawn mowers, etc.

This analysis also shows that 228 Mt CO²–e emissions were induced by exports. In the cases of both agriculture and mining, emissions embodied in exports exceeded emissions embodied in domestic final consumption. Embodied emissions associated with manufacturing exports (90Mt CO²–e) approached those related to domestic final consumption of manufactured products (126 Mt CO²–e).




In aggregate, for 2008–09 production–based emissions for Australia were 585 Mt CO²–e, while consumption–based emissions were equal to 531 Mt CO²–e. Therefore, the net trade balance of embodied emissions is 54 Mt CO²–e.


METHODOLOGICAL ASSUMPTIONS OF THE CONSUMPTION APPROACH

The consumption–based approach used here has two important assumptions that potentially affect the quality of the results. Firstly, in respect of GHG emissions, imported products are assumed to be produced using production functions that are identical to those used for locally produced products of the same type. Given the reliance on coal for electricity generation in Australia, a possible impact of this assumption is an overstatement of emissions embodied in imports. If this is the case, the data produced here will understate reported net exports of emissions. The assumption could be removed by incorporating global production functions and regional I–O models, though this would involve a considerable amount of additional data and would complicate the model significantly.

The second important assumption is that all consumers pay the same price per unit for their electricity. While neither assumption is expected to be entirely valid, to date no rigorous analysis of possible biases in the results has been undertaken. In both cases, the assumptions can potentially be addressed through the use of more sophisticated models to take these factors into account. Subject to the availability of data and resources, these developments may possibly be reflected in future editions of this work.


REFERENCES

Australian Bureau of Statistics (2013) Information Paper: Towards the Australian Environmental–Economic Accounts, cat. no. 4655.0.55.002, ABS, Canberra.

Hao, S., Legoff, G., Mahadeva, K., Chia, N. and Cadogan–Cowper, A. (2012). Australian Greenhouse Gas Emissions: Experimental Consumption–Based Estimates Via Input–Output Analysis, 20th International Input–Output Association conference (IIOA) 2012, Bratislava, 24–29 June 2012.

Legoff, G., (2010) CO² emissions embodied in the Australian international trade in goods 18th International Input–Output Association conference (IIOA) 2010, Sydney, 23 June 2010.

Footnote 1: Intergovernmental Panel on Climate Change (2006). 2006 IPCC Guidelines for National Greenhouse Gas Inventories Geneva, Switzerland. <back

Footnote 2: These are further outlined in the System of Environmental–Economic Accounts (SEEA) – an international statistical standard for combining environmental information with the existing macroeconomic statistical standard, the System of National Accounts (SNA). <back

Footnote 3: Net CO² released from Land Use Land Use Change and Forestry is included in Kyoto Protocol data from 2007–08 onwards and has been included in the estimates. <back

Footnote 4: Data from the Department of Climate Change National Inventory by Economic Sector provided the basis for estimates of GHG emissions produced by industry in Australia. <back

Footnote 5: The ‘Commercial and services’ industries are comprised of the following Australian and New Zealand Standard Industrial Classification (ANZSIC), 2006 (cat. no. 1292.0) industry Divisions: Wholesale Trade; Retail Trade; Accommodation and Food Services; Information Media and Telecommunications; Financial and Insurance Services; Rental, Hiring and Real Estate Services; Professional, Scientific and Technical Services; Administrative and Support Services; Public Administration and Safety; Education and Training; Health Care and Social Assistance; Arts and Recreation Services; and Other Services. <back