Environmental Input-Output Analysis: Application to Portugal

Transcription

1 UNIVERSIDADE TÉCNICA DE LISBOA INSTITUTO SUPERIOR TÉCNICO Environmental Input-Output Analysis: Application to Portugal Marta Alexandra Sousa e Silva (Licenciada) Dissertação para a obtenção do Grau de Mestre em Engenharia e Gestão de Tecnologia Presidente: Doutor Manuel Frederico Tojal de Valsassina Heitor Instituto Superior Técnico Universidade Técnica de Lisboa Vogais: Doutor Eduardo Anselmo Moreira Fernandes de Castro Universidade de Aveiro Doutor Paulo Manuel Cadete Ferrão Instituto Superior Técnico Universidade Técnica de Lisboa Doutor Pedro Filipe Teixeira da Conceição Instituto Superior Técnico Universidade Técnica de Lisboa Julho 2001

2 Resumo A crescente consciência ambiental demonstrada pelos cidadãos Europeus no que respeita à qualidade do meio ambiente e a determinação da Comissão Europeia em desenvolver políticas ambientais eficazes, incentiva o uso de novas metodologias de avaliação dos impactes ambientais decorrentes das actividades económicas. Esta tese contribui para este objectivo, sendo analisada a extensão dos quadros input-output das Contas Nacionais, de forma a incluir impactes ambientais. Neste contexto, a metodologia de input-output ambiental é aplicada ao cálculo dos gases com efeito de estufa em Portugal, decorrentes de um certo aumento da procura final em alguns sectores de actividade económica. As estimativas realizadas para 2010, com base em cenários de desenvolvimento estabelecidos por entidades públicas, demonstram claramente que, na ausência de medidas de carácter político, Portugal irá exceder largamente o limite imposto pelo Protocolo de Quioto, de não ultrapassar os níveis das emissões de 1990 de gases com efeito de estufa em mais de 27%. No decorrer da tese são discutidas algumas medidas políticas cuja implementação pode contribuir para diminuir a emissão de gases com efeito de estufa. Palavras Chave: Análise input-output, análise input-output ambiental, avaliação ambiental, emissão de gases com efeito de estufa, mudanças climáticas. i

3 Resumo Alargado A crescente consciência ambiental demonstrada pelos cidadãos europeus no que respeita à qualidade do meio ambiente e a determinação da Comissão Europeia em desenvolver políticas ambientais credíveis e eficazes, incentiva o uso de novas metodologias de avaliação dos impactes ambientais que decorram, em particular, das actividades económicas. Esta tese contribui para este objectivo, sendo analisada a extensão dos quadros input-output das Contas Nacionais, de forma a incluir impactes ambientais. O uso de tabelas input-output permite utilizar dados publicados por entidades oficiais, sendo, desta forma, um método pouco oneroso e fidedigno. O uso destes modelos é muito vantajoso na medida em que permite ter em conta toda a cadeia de valor (incluindo fornecedores indirectos), permitindo incluir a totalidade de inputs para um processo, evitando deste modo recorrer a fronteiras arbitrárias, nem sempre as mais indicadas para a análise que se pretende, permitindo desta forma uma análise mais precisa e detalhada. Nos anos mais recentes a análise input-output, outrora realizada somente para fins de análise económica, tem sido aplicada para avaliar e contabilizar fluxos de energia, poluição ambiental, produção de resíduos, ou o emprego associado à produção industrial, assim como outros tipos de problemas ambientais. O método usado nesta tese segue a abordagem desenvolvida pelo grupo de investigação Green Design Initiative da Universidade de Carnegie Mellon nos Estados Unidos da América, o qual foi denominado Economic Input Output Life Cycle Assessment (EIO-LCA). Esta abordagem permite estimar as emissões ambientais associadas com a variação da procura final, através da multiplicação das mudanças introduzidas nessa procura pelos níveis médios de poluição, consumo de energia, ou outro tipo de dano ambiental. Neste contexto, a metodologia de input-output ambiental é aplicada ao cálculo dos gases com efeito de estufa em Portugal, decorrentes do aumento da procura final em alguns sectores de actividade económica. As estimativas realizadas para o ano de 2010 foram desenvolvidas com base em cenários de desenvolvimento estabelecidos por entidades públicas e seguindo o método EIO-LCA. Os resultados desta análise demonstram claramente que, na ausência de medidas de carácter ii

4 político e segundo as projecções consideradas, Portugal irá exceder largamente o limite imposto pelo Protocolo de Quioto, de não ultrapassar em 27% os níveis das emissões de gases com efeito de estufa verificados em Estes resultados traduzem-se na forte necessidade de implementação a curto prazo de medidas políticas por forma a reverter esta tendência. As implicações políticas e as diferentes abordagens possíveis são discutidas no decorrer da tese, focando essencialmente o sector energético e o sector dos transportes por serem aqueles que contribuem mais fortemente para as emissões de gases com efeito de estufa. Palavras Chave: Análise input-output, análise input-output ambiental, avaliação ambiental, emissão de gases com efeito de estufa, mudanças climáticas. iii

5 Abstract The growing environmental awareness of the European citizens and the European Commission commitment in developing wider policies on environment require new methodologies for assessing the environmental impacts of the economic activities. This thesis contributes to this purpose, by extending the well-established input-output analysis based on the National Accounting System to include environmental impacts and provides the application of this method to Portugal. The Environmental Input-Output methodology is used to estimate greenhouse gas emissions in Portugal based on a publicly available forecast for the growth of different Portuguese economic sectors. The results obtained for 2010 clearly demonstrate that if no policy action is taken, Portugal will largely surpass the emission target of 27% increase, comparatively to the 1990 s levels, agreed in Kyoto. Effective policy measures to be taken in the short range to revert this tendency are discussed in this thesis. Key words: Input-output analysis, environmental input-output analysis, environmental assessment, greenhouse gas emissions, climate change. iv

6 ACKNOWLEDGMENTS First of all, I would like to thank the Center for Innovation, Technology and Policy Research (IN+) for providing me with fund and all the facilities to carry out this Master thesis, and particularly to Prof. Manuel Heitor for inviting me to work at this Center as a research student. I would like to specially thank my outstanding supervisor, Prof. Paulo Ferrão, for all the technical and human support during the last year. I thank for all the encouragement and guidance when I felt confused, and for all the inspiration and motivation to face this challenge. Particular thanks goes also to my family, friends and Master colleagues and especially to Pedro, for all the patience, love and support. Their support was chief in the execution of this Master thesis. I also would like to thank Jorge Nhambiu the enriching discussions, inputs and ideas to this work. A final and special thanks goes to FORDESI, SA for all the time flexibility and motivation that allowed the conclusion of this work. v

7 List of Contents 1 INTRODUCTION Motivation and Objectives Dissertation Organisation and Contribution INPUT-OUTPUT ANALYSIS Input-Output Analysis Historical Overview Input-Output Fundamentals Structure of an Input-Output Model The Transaction Table Technical Coefficients Table Interdependence Coefficients Matrix Use of Input-Output Analysis to Trace Environmental Discharges Economic Input-Output Analysis: The Portuguese Case Study The Portuguese Input-Output Tables Evolution of the Portuguese Economy ( ) Environmental Input-Output Analysis: The Portuguese Case Study Global Warming Theoretical Overview Political Overview International Actions The Kyoto Protocol Prospective Analysis for Greenhouse Gas Emissions in Portugal Portuguese Greenhouse Gas Emissions Economic Development Scenarios for Portugal Application of the Environmental Input-Output methodology to Portugal. Prospective GHGs emissions for Discussion and Main Conclusions Discussion Compliance Mechanisms Transportation sector Energy sectors Other Measures Conclusions...87 vi

8 List of Figures Figure 1 - Input-Output System Schema Figure 2 Portuguese input-output transaction table (1995) Figure 3 Portuguese technical coefficients table (1995) Figure 4 Portuguese interdependence coefficients matrix (1995) Figure 5 Principal supply components (at constant prices of 1995) Figure 6 Total output by economic sector in 1990 and 1995 (prices of 1995) Figure 7 Total output variation between 1990 and 1995 (prices of 1995) Figure 8 Contribution of Agriculture, Industry and Services sectors to national gross value-added Figure 9 Contribution of Services sectors to national gross value-added Figure 10 Contribution of Agriculture, Sylviculture and Fishing sectors to national gross value-added Figure 11 Contribution of the Industry sectors to national gross value-added Figure 12 Variation in the Portuguese technical coefficients Figure 13 Technical coefficient change in the Cooking Oil and Food Fats from 1990 to Figure 14 Technical coefficients change in the Fishing sector between 1990 and Figure 15 Technical coefficients change in the Land Transport sector between 1990 and Figure 16 Technical coefficients change in the Maritime and Air Transportation sector between 1990 and Figure 17- Solar radiation interaction with the surface of the earth Figure 18 Atmospheric carbon dioxide concentration and temperature change Figure 19 Solar activity versus climate Figure 20 CO 2 concentration Figure 21 Global average temperature Figure 22 - Global average temperature Figure 23 International institutional context of climate change Figure 24 Economic sectors that contribute the most for National Global Warming Potential Figure 25 Energy consumption in Portugal by economic sector Figure 26 National passenger transportation in vii

9 List of Tables Table 1 Input-output transactions table Table 2 Portuguese economic sectors Table 3 - Share of GDP per Sector in European Countries in Table 4 Reduction target of GHGs emissions for Portugal Table 5 Portuguese greenhouse gas emissions by economic sector in Table 6 Global warming potential of different gases Table 7 Greenhouse gases emissions in Portugal (1990 and 1995) and the consequent GWP Table 8 Annual growing patterns by economic sector for Portugal Table 9 Economic sectors included in the National Energetic Plan (DGE) and in the National Accounts (INE) Table 10 Total growth by economic sector for Portugal Table 11 Increase in greenhouse gas emissions forecasted for 2010, according with scenario A Table 12 Increase in greenhouse gas emissions forecasted for 2010, according with scenario B Table 13 Total greenhouse gas emissions forecasted for 2010 in Portugal, according with scenario A Table 14 Total greenhouse gas emissions forecasted for 2010 in Portugal, according with scenario B Table 15 Comparison between the GWP increase estimated for 2010 and the levels agreed in Kyoto viii

10 1 INTRODUCTION 1.1 Motivation and Objectives The growing concern of the European citizens for the quality of the environment and the European Commission commitment in developing wider policies on the environment increases the need for an environmental information system, which helps to measure progress towards a sustainable society. In this context, decision-makers in industry and government need tools and methodologies to pro-actively identify sustainable options, optimised as to environmental, social and economic aspects. Current Life Cycle Assessment (LCA) methods, frequently used with the purpose of accounting environmental impacts of products and services, have vast limitations namely in terms of excessive cost, choosing an appropriate problem boundary, availability of data from each industry, which is associated, directly or indirectly, to the product/service analysed. Conversely, matrix representation allows using publicly available, standard data sources, such as the national sector-based economic input-output tables, constituting a low-cost and coherent approach to environmental accounting, if additional information emissions and use of natural resources are added and detailed results are not required. The use of input-output models is advantageous since they take into account the entire supply chain for a product (including indirect suppliers), allowing tracing the full range of inputs to a process, thus avoiding arbitrary analysis boundary decisions. The ever greater need for disaggregated and analytically flexible tools, demands the fruitful use of matrices of sector interdependence with their powerful store of information. The fundamental interest of the input-output approach is the elaboration and the development of methodologies whose final purpose is the application to contemporary policy. Input-Output (I-O) models represent forms of simulation analysis with a relatively long history, tracing their conceptual underpinnings to the mid-1700 s in France, where it is generally accepted that mathematical economics first got its start. In fact, input-output models can be thought of as formalisation of concepts set forth many years earlier by the French economist François Quesnay. However, this framework is only known as input-output analysis after the work developed by Wassily Leontief in the late 1930s for which he received the Nobel Prize in Economic Science in The availability of high-speed digital computers has made input-output a very useful tool and one of the most widely applied methods in economics nowadays. For example, United Nations has promoted input-output as 1

11 a practical planning tool for less-developed countries and has sponsored a standardised system of economic accounts for developing input-output models. According to Leontief, economic input-output analysis is a method of systematically quantifying the mutual interrelationships among the various sectors of a complex economic system. In practical terms, the economic system to which it is applied may be as large as a nation or even the entire world economy, or as small as the economy of a metropolitan area or even a single enterprise. In all instances the approach is essentially the same. The structure of each sector s production process is represented by an appropriately defined vector of structural coefficients that describes in quantitative terms the relationship between the inputs it absorbs and the outputs it produces. The interdependence among the various sectors of a given economy is described by a set of linear equations expressing the balances between the total input and the aggregate output of each commodity and service produced and used in the course of one or several periods of time. Input-Output analysis provides a robust and relatively easily understood analytical technique providing businesses, state and local governments, economic and resource planners, policy makers, and academicians the means to more completely understand and evaluate the extensive economic interactions and financial linkages that typically characterise economies nowadays. Through the application of input-output analysis, private and public sectors have the means to better assess the widespread impacts and repercussions of their business decisions and public policy actions and make more informed decisions based on established direct and indirect economic linkages and impacts among the various industry sectors. In fact, the great virtue of input-output analysis is that it surfaces the indirect internal transactions of an economic system and brings them into the reckoning of economic theory. Within each sector there is a relatively invariable connection between the inputs it draws from other sectors and its contribution to the total output of the economy (Leontief, 1986). In recent years the input-output framework has been extended to deal more explicitly with topics as interregional flows of products and accounting for energy consumption, environmental pollution, and employment associated with industrial production. Indeed, these models are highly flexible and can be used to address a number of economic, resource, and even environmental impacts, namely in terms of the effects of economic growth on air and water pollution, energy consumption, traffic congestion, waste disposal and other environmental burdens. In fact, any input factor that can be quantified in terms of a given level of an industry s output, for example pollution, or infrastructure requirements, may be promptly incorporated into the I-O modelling process. 2

12 The method used in this work follows the approach of the Carnegie Mellon University s Green Design Initiative, the so-called Economic Input Output Life Cycle Assessment (EIO- LCA). This method allows to forecast the direct economic changes associated with certain choices. An economic input-output table is then used to estimate both direct and indirect changes in output throughout the entire economy, for each sector. Finally, the environmental discharges associated with the changes are evaluated by multiplying the output changes by the average level of a pollutant, electricity use or any other type of environmental burden. Hence, this vector of additional discharges characterises the overall environmental impact caused by a specific variation of final demand. This thesis extends the EIO-LCA methodology to Portugal, where publicly available data is used to demonstrate the usefulness of the methodology in analysing the environmental impacts originated by the national economic activity, taking into account the greenhouse gas (GHG) emissions specified in the Kyoto Protocol. The main reason for choosing the greenhouse gases as a research topic is the importance attached to greenhouse gas emissions by the European Union and their impact on global warming and climate change. Indeed, climate change is widely recognised as a serious potential threat to the world s environment, since it is expected to have wide-spread consequences, including sea-level rise and possible flooding of low-lying areas; melting of glaciers and sea ice; changes in rainfall patterns with implications for floods and drought; and more climatic extremes (especially high temperatures). These effects have major impacts on ecosystems, health, water resources and key economic sectors, such as agriculture. There is increasing evidence that greenhouse gas emissions from human activities are causing an enhanced greenhouse effect. The dominant human activity or driving force for climate change is fossil-fuel combustion, due to its carbon dioxide emissions. Other activities that also contribute to GHGs emissions are agriculture, land use changes, i.e. deforestation, waste disposal to landfills and industrial processes such as cement production, refrigeration, foam blowing and solvent use. At the Third Conference of the Parties of the United Nations Framework Convention on Climate Change (UNFCCC) held in Kyoto in December 1997, several developed countries agreed on various commitments aiming the reduction of GHGs (Kyoto Protocol). Namely, to reduce the 1990 levels of carbon dioxide, methane, nitrous oxide, HFCs, PFCs and sulphur hexafluoride emissions by an overall of 5% in This reduction will be expressed in carbon dioxide equivalents using global warming potentials with a 100-year time horizon. In the Kyoto Protocol it is stipulated that the European Union member states as a group will have to reduce greenhouse gas emissions by 8% between , taking 1990 emissions level as a reference. Portugal has been allowed to increase 27% its emissions, according to the burden share agreement. However, due to the high rates of growth occurred in the last few 3

13 years, active policies must be conducted to reduce the greenhouse gas emissions to appropriate levels. With the strong belief that this Protocol is essential as a step forward on the actual tendencies of climate change and that the actions to be developed under what was established in the Protocol are vital for future generations, this work intends to contribute to this objective, mainly by providing a methodology to better assess the real GHGs production in Portugal and to evaluate the trends towards the future. Actually, in order for a country to take actions in agreement with the Kyoto Protocol, it must develop methodologies to increase the knowledge base about the GHGs emissions within the whole economy and, particularly, in the sectors that most contribute to this increase. The purpose of this thesis is make use of this new methodology to evaluate greenhouse gas emissions, or other kind of environmental burden, enabling governments to better access the amount of greenhouse gases released, their origins and, as a consequence, a solid basis to establish policy actions to promote the sustainable development. 1.2 Dissertation Organisation and Contribution The present dissertation discusses the use of environmental input-output analysis methodology to assess and estimate environmental burdens, with special emphasis on the evaluation of greenhouse gas emissions in Portugal. In chapter 2, the input-output analysis methodology is described as well as its extended application in order to include environmental discharges. In chapter 3, the input-output framework is applied to Portugal, allowing the analysis of the data characterising the evolution of the National economy between 1990 and 1995 in different economic sectors. In chapter 4, the extended environmental input-output methodology is applied to calculate future emissions of greenhouse gases in Portugal. The case study aims to estimate the potential greenhouse gas emissions in Portugal by 2010, in order to assess the National compliance with the established in the Kyoto Protocol. Chapter 5, is focused on general policy considerations to help the mitigation of the greenhouse gas emissions and alleviate the effect of global warming. A discussion about the best way to respect and accomplish the levels of compliance agreed in Kyoto is also provided. This chapter concludes with the main contribution of this thesis, which is focused on the development of a valuable new methodology to assess, in a systematic and structured way, 4

14 any category of environmental impact. Additionally, it is suggested its further development and dissemination as a standard framework to calculate environmental burdens associated with economic activity. 5

15 2 INPUT-OUTPUT ANALYSIS 2.1 Input-Output Analysis Historical Overview Input-Output models can trace its earliest documented beginnings to 1758 when the French economist, François Quesnay, published the Tableau Economique showing a diagrammatic representation of the process of tracing sales and expenditures through an economic system, in a systematic way. This first recorded effort attempted merely to trace the economic transactions involved in the production of a single commodity a loaf of bread from the growing of the wheat, to the milling, baking, distribution, and sales to the final consumer. As simple as this process might seem, when combined with the economic behaviour and interactions of other economic sectors, directly and indirectly involved in this activity, one can quickly perceive the complexities associated with tracing even a simple economy transaction. Nevertheless, this first effort demonstrated the practical usefulness in being able to describe inter-industry linkages. The lack of sophisticated and comprehensive data compilation at that time, as well as the inability to effectively deal with the resultant complex mathematical relationships inherent in this form of analysis, precluded a more extensive incorporation of other commodities and other industrial sectors of the economy. Nonetheless, the far-reaching possibilities for economic input-output analysis were visibly demonstrated. The next major effort in this area was performed more than a century after by another French economist, Léon Walras, who, in the 1870 s, developed a general equilibrium model, which attempted to solve simultaneously the demand and supply conditions of all economic sectors. In this work, Walras employed a set of production coefficients that linked the quantities of factors required to produce a unit of a particular product to levels of total production of that product. Walras examined both the interdependence of producing industries and what each producing sector needed from the other supplying industries (the linkages) to produce a unit of a finished good. Though, Walras general equilibrium model was assumed as a theoretical one due to both the impressive computational demands as well as the model s wide-ranging data needs, which could not be entirely fulfilled. Due to difficulties namely in terms of growing modelling system s complexity, lack of comprehensive data sources and difficulties in manipulating the vast amounts of information, the potential usefulness of this form of inter-industry analysis could not be entirely recognised at that time. Nevertheless, this effort represented a significant extension of I-O analysis to an entire economic system, and not just the coverage of a single product or a single economic 6

16 sector. It was only when Professor Wassily W. Leontief, from the Harvard University, presented an input-output system of the United States economy and developed a more rigorous analytical framework that the use of these techniques gained popularity and practical application. Leontief presented in 1936 the theoretical framework and U.S. tables for 1919 and 1929 in a book called The structure of the American Economy , followed by his first book on the input-output structure of the U.S. economy, in This book was revised in 1951 in an enlarged and expanded edition that presented the U.S. input-output table for Leontief was interested in identifying the industrial interdependence within the American economy and in developing a mathematical model within which all linkages could be stated and estimated statistically. Leontief s work was made possible mainly through the simplification of Walras earlier general equilibrium model such that the model s equations could now be estimated empirically, that is, by using more readily available published data. In fact, his model is an approximation of the Walrasian model, with several important simplifications that allowed a theory of general equilibrium to be put in practice. Since this original work, the input-output technique has become the most popular inter-industry model around the world, for which he received the Nobel Prize in Economic Science in Currently, the availability of detailed and extensive business and economic data, the widespread use of powerful computer systems, the availability of sophisticated software programs, and the fact that input-output model represents little more than a matrix (algebraic) manipulation of a specific economy s transactions table of relevant industry data, make this form of analysis far more widely accepted and used and more easily adapted and extended to the full spectrum of economic systems, from national to regional, state and county, and even city levels. Nowadays, input-output analysis has become extremely important to all the highly industrialised countries in what concerns economic planning and decision-making, because it allows tracing the flow (direct and indirect) of goods and services through and between different industries. In fact, the use of input-output models has some main advantages that make them particularly well suite to analyse structural change and economic transactions, such as:!"comprehensive and consistent data. Input-output tables encompass all the formal economic activities that occur in an economy. Usually, a considerable amount of data sources are used to ensure the completeness and internal consistency of the data, resulting, probably, in the single most comprehensive and complete source for economic data for most countries. In this context, input-output tables frequently play a fundamental role in structuring the national accounts, meaning that the data is systematically checked for their accuracy, and that the tables are intrinsically linked with many of the traditional indicators 7

17 of economic performance such as production and GDP. In fact, as economic structures, industry concentrations, technologies, product mixes and sources of inputs continually change, the I-O model s transaction table must be continually updated and refined in order to incorporate the behaviour of a dynamic economic system. Nonetheless, the requirement for detailed and comprehensive data can be also a limitation of the model since it may not always be readily available through published, or secondary data sources. In reality, each major industry sector must be extensively analysed regarding the nature of its production mix, specific industry sources of inputs, and industry sectors to which sales are made. Some major features of the input-output analysis are discussed in the following paragraphs:!"an economy is analysed as an interconnected system of industries that directly and indirectly affect one another, tracing structural changes back through industrial interconnections. Input-output techniques trace all the linkages and connections among all industries within an economy. Thus, when analysing an economy s reaction to changes in the market place or in the final demand, this type of analysis has the ability to capture the indirect effects of that change. In sum, it permits the disentanglement and accurate measurement of the indirect effects.!"identify the sources of change as well as the direction and magnitude of the change. Changes in output can be linked with underlying changes in factors such as exports, imports, final demand as well as technology. This methodology permits a consistent estimation of the relative importance of these factors in creating output and employment growth. In sum, it provides economic projections and forecasts giving the means to better predict changes in industrial output resulting from changes in demand.!"resource input requirements. Determining for example demands for energy, water, timber and building products, land, minerals, and other natural resources arising from changes in the demand for a certain product.!"environmental impacts. Determining for instance the changes in the levels of air and water pollution, traffic congestion, energy consumption, and other similar factors due to changes in the final output. However, the input-output framework has also some limitations. Those limitations, according to the OECD document, Structural Change and Industrial Performance (1998), are:!"input-output analysis assumes constant returns to scale. The model assumes that the same relative mix of inputs will be used by an industry to create output regardless the quantity produced. This fact has some implications, such as: 8

18 !"Technical coefficients are assumed to be constant. The amount of each input necessary to produce one unit of certain output is assumed to be constant. Hence, the amount of input purchased by a sector is determined exclusively based on the level of output desired; no consideration is made to price effects, changes in technology or economies of scale.!"consequently, input-output analysis assumes linear production functions. The input-output process assumes that if the output level of an industry changes, the input requirements will have to change in a proportional way. For instance, if the output is doubled, inputs will also need to be doubled. In cases where innovative technology allows either input substitution or greater efficiencies in the use of inputs, impacts to supplying industry sectors may be seriously misrepresented by thoroughly adhering to the assumption of linearity.!"each product within an industry is assumed to be the same. There is no substitution between inputs. The output of each sector is produced with a unique set of inputs.!"there are no resources constrains. Supply is assumed infinite and perfectly elastic.!"local resources are efficiently employed. There is no underemployment of resources.!"actuality of input-output data. There is a long time lag between the collection of data and the availability of the input-output tables. In fact, input-output tables provide a snapshot of the complete economy and all of its industrial interconnections at a specific point in time. The required data covers only a specific period of time and therefore may fail to capture longer-term trends and changes in economic relationships of an evolving economic system. 2.2 Input-Output Fundamentals Structure of an Input-Output Model The basic Leontief input-output model is generally constructed from observed economic data for a specific geographic region (nation, state, county, etc.), concerning the activity of a group of industries that both produce goods (outputs) and consume goods from other industries (inputs) in the process of producing each industry s own output interindustry consumption. The data required to fulfil the input-output model consists in flows of products from each of the producing sectors to each of the purchasing sectors. These interindustry flows (or intersectoral) are measured for a particular time period (usually a year) and in monetary terms. 9

19 Basically, an input-output model consists of three basic tables, which are analysed in the following sections: the transaction or flow table, the technical coefficients table and the direct requirements table The Transaction Table The fundamental information with which one deals in input-output analysis concerns the flows of products from each industrial or service sector considered as a producer to each of the sectors considered as consumers. This basic information, from which an input-output model is developed, is contained in an interindustry transactions table - the central core of the input-output analysis -, which is not merely a device for displaying or storing information but is above all an analytical tool. The transaction table describes the flow of goods and services (in value) between all the individual sectors of a national economy over a stated period of time. In order to achieve this, one needs to know what amount of output of a particular sector can be purchased for one monetary unit at prices that prevailed during the interval of time, which the table was constructed (Leontief, 1986). While the physical measure is probably a better reflection of one sector s use of another sector s product, there are enormous measurement problems when sectors actually sell more than one good. Therefore, although in principle intersectoral flows can be thought of as being measured in physical units, in practice most input-output tables are constructed in value terms. Although its application is simple, the construction of an input-output transaction table is a highly complex and laborious operation. The first step, and one that has little appeal to the theoretical imagination, is the gathering and ordering of an immense volume of quantitative information. The kinds of surveys needed to collect input-output data for an economy can be expensive and very time consuming, resulting in tables of input-output coefficients that are old before they are born. Given the inevitable lag between the accumulation and the collation of data for any given year, the input-output table will always be a historical document (Leontief, 1986). In this context, for practical purposes the original figures in the table must be regarded as a base, subject to refinement and correction according with subsequent trends. The entries in the transactions table can be named x ij where i is the sector from which the flow comes and j is the sector to where it goes. The row entries in a transaction table describe the way in which the total sales or each sector are allocated over the remaining sectors in the economy and the column entries describe the inputs or purchases side of each sector in relation to all other sectors. Since each figure in any horizontal row is also a figure in a 10

20 vertical column, the output of each sector is shown to be an input in some other. These interindustry exchanges of goods constitute the shaded portion of table 1. The additional columns, labelled Final Demand, record the sales to the households, government and foreign trade. As a matter of fact, each producing sector within the economy has certain amount of output that may be used within the sector, sold as inputs to other producing sectors or sold for final demand to consumers. For example, electricity is sold to other sectors as input to production (an interindustry transaction) and also to consumers (a final demand sale). Usually the demand of these external units is generally determined by considerations that are relatively unrelated to the amount being produced in each of the units. When all purchases or expenditures by sector are considered, total sector output is exactly equal to sector outlay. Such a table may be developed in as fine or as coarse detail as the available data permit and the purpose requires. PRODUCERS Agriculture Mining Construction Manufacturing Trade Transportation Services Other Personal Consumption Expenditures Gross Private Domestic Investment FINAL DEMAND Net Exports of Goods and Services Government Purchases of Goods and Services Agriculture Mining PRODUCERS Construction Manufacturing Trade Transportation Services VALUE ADDED Other Employees Owners of Business and Capital Government Employee compensation Profit: type income and capital consumption allowances Indirect business taxes Table 1 Input-output transactions table Source: U.S. Department of Commerce, Bureau of Economic Analysis Thus, if the economy is divided into n sectors, and if we denote by X i the total output (production) of sector i and by Y i the total demand for sector i s product, we may write X i = x i1 + x i2 + + x ii + +x in +Y i (1) 11

21 The x terms on the right-hand side of equation 1, represent the interindustry sales by sector i, thus the entire right-hand side is the sum of all sector i s interindustry sales and its sales to the final demand, representing the distribution of sector i s output. Therefore, for each of the n sectors there will be: X 1 = x 11 + x x 1i + +x 1n +Y 1 X 2 = x 21 + x x 2i + +x 2n +Y 2.. (2). X i = x i1 + x i2 + + x ii + +x in +Y i. X n = x n1 + x n2 + + x ni + +x nn +Y n The x elements represent the sales to sector i, meaning i s purchases of the products of the various producing sectors in the country. Clearly beside the interindustry purchases or inputs to production, a sector also pays for other items, such as labour and capital, and uses other inputs as well, such as inventoried items. All of these inputs are termed the value added in sector i. In addition, imported goods may also be purchased as inputs by sector i Technical Coefficients Table The transaction table provides an interesting and useful snapshot of the structure of an economy, however is only descriptive of the current situation and thus not very useful for economic analysis. In order to use input-output techniques analytically to examine how production in each sector will change in response to a certain change in the final demand it is necessary to use the technical coefficients table. The technical coefficients show the value of inputs purchased from all sectors in the economy per monetary unit of output in a particular sector, in other words, they show the production function for each productive sector. For instance, for a given sector A, technical coefficients represent the value of purchases from each sector in the economy that must be made by the sector A in order for it to produce one monetary unit worth of output. Therefore, technical coefficients can be derived by dividing all entries in each sector s column by the total outlay of that sector. If, from the transaction table, x ij symbolise the value of sales from sector i to sector j and x j the total output of sector j, the technical coefficients (described by the symbol a ij ) for each sector are calculated using the following equation: 12

22 a ij = x ij / x j (3) A complete set of the input coefficients of all sectors of a given economy arranged in the format of a rectangular table is called the structural matrix or technical coefficients matrix of that economy. A table of technical coefficients for the entire economy gives us, in as much detail as we require a quantitatively determined picture of the internal structure of the system. In order to compare the structural properties of two economies, or the structural characteristics of the same economy at two different points of time, one only needs to compare two technical coefficient matrices. The only difficulty that may arise in doing such a comparison might be caused by the incompatibility of the sectoral breakdown in terms of which the two tables were originally compiled (Leontief, 1986). With this table for the economy as a whole, it is possible to calculate the secondary demand on the output of the industries that supply a specific industry s suppliers and so on through successive outputs until the effect of the final demand has been traced (Leontief, 1986). The effect of an event at any point is transmitted to the rest of the economy step by step via the chain of transactions that links the whole system together Interdependence Coefficients Matrix The interdependence coefficients matrix is the most important of the three input-output matrices for economic analysis purposes. The coefficients or elements of this matrix measure the total (direct and indirect) output required of all sectors in order for any particular sector to make a sale of one monetary unit to final demand. In other words, it measures the total impact of a change in final demand in a given sector on the output of all other sectors of the economy after all successive rounds of output increases have been recorded. The next paragraph discusses its algebraic formulation. In a broad way, the commodity flow balance, takes the form: x + m = Ax + F = Ax + f C + f G + f I + f V + f E (4) where the left side, x + m, represents the total supply of commodities by sector and the right side represents the total demand for commodities, and: 13

23 x n-vector, total output by sector; m n-vector, imports by sector; A n n matrix, technical coefficient matrix; the element ij in the matrix shows how much of sector i s output is used as input by sector j per unit of output; F n-vector, total final consumption by sector; f C private consumption by sector, includes households and private non profit institutions; f G public consumption; f I gross fixed capital formation by sector of production (investment); f V changes in inventories plus statistical error; f E exports. The previous equation allows determining the total output produced in the whole economy given the levels of total final demand for commodities (private and public consumption, exports, etc.). As it was stated before, the interindustry relationships among sectors was defined as a ij = x ij /X j. This expression can be rearranged to read x ij = a ij. X j, meaning that the level of sales from sector i to sector j depends upon the level of output in sector j (X j ) and the technical coefficient of input requirements of sector j from sector i (a ij ). Being, F, the final demand vector, which contains the monetary changes in each sector s final demand; A, the technical coefficients matrix and X a vector representing the overall changes in output by sector, in an economy with only three producing sector, for instance, the transactions of the producing sectors may be written as a set of simultaneous equations: x 11 + x 12 + x 13 + F 1 = X 1 x 21 + x 22 + x 23 + F 2 = X 2 (5) x 31 + x 32 + x 33 + F 3 = X 3 where, x ij sales from sector i to sector j F i sales from sector i to final demand X i total output of sector i 14

24 Substituting equation x ij = a ij. X j into equation 5 and rearranging the equations for the producing sector (i = 1,, 3), a 11 X 1 + a 12 X 2 + a 13 X 3 + F 1 = X 1 a 21 X 1 + a 22 X 2 + a 23 X 3 + F 2 = X 2 (6) a 31 X 1 + a 32 X 2 + a 33 X 3 + F 3 = X 3 The previous equation disclose the interdependence of each sector on all others because it shows that the level of output in any sector is dependent on the level of output in the other sectors, on the input requirements of each sector and on the level of its final demand. Assuming the final demand (F i ) as exogenous to the producing sectors: X 1 a 11 X 1 a 12 X 2 a 13 X 3 = F 1 -a 12 X 2 + X 2 a 22 X 2 a 33 X 3 = F 2 (7) -a 31 X 1 + a 32 X 2 + X 3 a 33 X 3 = F 3 or, (1 a 11 )X 1 a 12 X 2 a 13 X 3 = F 1 -a 21 X 1 + (1 a 22 )X 2 a 23 X 3 = F 2 (8) -a 31 X 1 a 32 X 2 + (1 a 33 )X 3 = F 3 The system can be simplified displaying it in a matrix notation, X X X (1 a = a a ) a (1 a a ) a a (1 a 33 ) 1 F1 F 2 F 3 or: (I A)X = F (9) The solution that expresses each sector s output (X) as a function of final demand (F) might be found by the following manipulation. Pre-multiplying by (I A) -1 gives: 15

25 X = (I A) -1 F (10) The previous equation is the solution equation to the input-output system though which we can find the levels of output from all sectors required to support specified levels of final demands in all sectors. The (I A) -1 is called the inverse Leontief matrix or matrix of interdependence coefficients and the elements of this matrix measure the direct and indirect output levels from each producing sector of the economy required to satisfy given levels of final demand. The matrix (I-A) -1 is also referred as the multiplier matrix as it shows the direct and indirect requirements of input-output per unit of sectoral final demand. From such viewpoint equation (10) can be seen as the result of an iterative process that shows the progressive adjustments of output to final demand and input requirements, meaning it can be expanded to the infinite series of intersector transactions: X = (I + A + A 2 + A A n-1 ) F (11) The first component on the right-hand side of equation 11 shows the direct outputs requirements to meet the final demand vector (F). The second component shows the direct output requirements satisfying, in the second round, the intermediate demand vector, AF, needed for the production of vector F in the previous round; the third component shows the direct output requirement for the intermediate consumption, A 2 F, required for the production of vector AF in the previous round, and so on until the process decays and the sum of the series converges to the multiplier matrix (I-A) -1. It is important to notice that equation 10 provides the total output (X) needed to satisfy a certain increase or decrease in the final demand F, being useful to examine how production will change in response to a certain change (variation) in the final demand. If one needs to determine the value of total output produced in the whole economy derived from the real value of final demand, and not only its variation, will have to use equation 4. The model presented above consists in the input-output static model, a cross-section in time, where changes in the economy over periods of time are measured by comparing before and after pictures. 16

26 Dynamics is introduced by taking into consideration the investment behaviour and so stating explicitly the rules for passing through one single period to the following. Equation 10 would then become the well-known Leontief dynamic system: X(t) = Ax (t) + B (x(t+1) x(t)) + F*(t) (12) Where vector F*(t) represents the final demand vector after the new capital requirements have been taken out and matrix B, i(t)=k(t+1)-k(t)=b (x(t+1)-x(t)), is the capital coefficients matrix, showing the new capital requirements for the input-output sectors for one unit change in the output vector. The dynamic models of the economy are much closer to the actual processes of economics, however it requires for stocks as well as flow of goods, for inventories of goods in process and in finished form, for capital equipment, for buildings, and for dwellings and household stocks of durable consumer goods. The dynamic input-output analysis requires more advanced mathematical methods for instance, instead of ordinary linear equations it leads to systems of linear differential equations. Among the questions the dynamic system should make it possible to answer, one could mention the determination of the changing pattern of outputs and inventories or investments and capacities that would attend a given pattern of growth in final demand projected over a five or ten-year period (Leontief, 1986). Due to more advanced mathematical methods required, the huge amount of actual data necessary and the level of analysis and objectives desired for this work, it will be used the static method described above instead of a dynamic approach. 2.3 Use of Input-Output Analysis to Trace Environmental Discharges The complexity of the interaction between human activities (through economic goods) and environmental systems has long been recognised. It is often argued that policy analysts do not sufficiently consider this complexity in their evaluation of policy options for environmental regulations. In a world of perfect information and efficient markets, the need for environmental policies would not exist since all scarce resources, including the environment, would be allocated based upon their scarcity. However, such is not the case and throughout the world, political institutions are faced with the task of correcting market failures associated with the use (or abuse) of the environment. 17

27 In this context, to develop the appropriate policy responses to prevent the various types and consequences of pollution, or other environmental burdens, requires the input of a vast array of expertise, a clear description of the current situation and accurate mechanisms to evaluate different options, focusing the desired output results. In this section a useful methodology to support policy making, providing the endpoints necessary as inputs into policy models, is described. It is intuitive that effective environmental decision-making requires, among other things, information about the consequences of alternative designs, available materials, manufacturing processes, product use pasterns and disposal. One of the most well known and common tools to provide this type of information is Life-Cycle Assessment (LCA) methodology (Ferrão, 1998). This methodology attempt to quantify the environmental implications of alternative products and processes tracing pollution discharges and resources use through the chain of producers and consumers. It involves quantification of the environmental burdens (inventory analysis), estimation of the impacts of these burdens on humans and nature (impact analysis), and identification of areas where improvements are possible (improvement analysis) (Horvath and Hendrickson, 1998). As defined by ISO , Life-cycle Analysis (LCA) is a technique for assessing the environmental aspects and potential impacts associated with a product by compiling an inventory of environmentally relevant inputs and outputs of a system, evaluating the potential environmental impacts associated with those inputs and outputs and interpreting the results of the inventory and impact phases in relation to the objectives of the study. Life-cycle analysis seeks to characterise the direct and indirect impacts of a product or process from raw material extraction through product disposal, looking systematically at the environmental effects of various stages of a product s life cycle: the materials extraction stage, the manufacturing/production stage, the use phase, and the ultimate disposal phase (or end-oflife). In short, it attempts to measure the cradle-to-grave environmental impacts of a product. One of the most widely used tools for performing life cycle analysis is that advocated by the Society for Environmental Toxicology and Chemistry (SETAC) and the U.S. Environmental Protection Agency (EPA). The SETAC-EPA approach divides each product into individual process flows, and tries to quantify their environmental effects during its life cycle. Existing studies differ in the number of environmental effects quantified, and in the scope of the analysis, which is determined by where the boundary of the analysis is drawn. 1 In ( 18

28 Despite the useful aspects and the need of conducing LCA, several numbers of limitations to the LCA methodology have been pointed out in the literature, such as:!"as several different variants of assessment methods are currently in use, it is difficult to compare the results of different LCAs (Behrendt, Jasch, Peneda and Weenen, 1997). Moreover, equally credible analyses can produce qualitatively different results, so the results of any particular life-cycle analysis cannot be defended scientifically (Lave, Cobas-Flores, Hendrickson and McMichael, 1995).!"The availability of data is not usually sufficient and its quality varies widely (Behrendt, Jasch, Peneda and Weenen, 1997). Meaning that, there is lack of comprehensive data for LCA and the data quality is not uniformly high (Lave, Cobas-Flores, Hendrickson and McMichael, 1995).!"LCA always involves simplifications and, because not all required data are available, some information will unavoidably be off a qualitative nature (Behrendt, Jasch, Peneda and Weenen, 1997).!"The scope of a LCA analysis is limited (simplified) by drawing an ad hoc system boundary that excludes all but a few upstream and downstream processes. Defining system boundaries for LCA is arbitrary and controversial, considering each industry is dependent, directly or indirectly, on all other industries (Fiksel, 1996). The interdependent and interactive nature of the modern economy means that a narrow focus can ignore important effects and lead to qualitatively incorrect conclusions. In fact, the indirect effects of increased production of a commodity typically are larger than the direct effects. According to a study performed by Lave, Cobas-Flores, Hendrickson and McMichael (1995) comparing paper cups versus plastic cups, the SETAC-LCA discharge estimates are less than one-half of the total discharges, considering all interdependencies. In fact, the indirect economic effects of an initial order are large, generally more than twice that of the direct effect, concluding that they cannot be neglected in the analysis without seriously underestimating the total discharges. Therefore, analysts should be extremely cautious in making such assumptions as environmental impacts can vary significantly from process to process and from industry to industry.!"the process model analysis is expensive and time consuming because inputs and environmental burdens have to be either empirically gathered or obtained from literature (if available) (Hendrickson, Horvath, Joshi, Klausner, Lave and McMichael, 1998). LCA is data intensive and thus expensive to conduct (Fiksel, 1996). Moreover, it is slow for application in the design process (Lave, Cobas-Flores, Hendrickson and McMichael, 1995). 19

29 !"LCA does not account for other, non-environmental aspects of product quality and cost (Fiksel, 1996).!"LCA cannot capture the dynamics of changing markets and technologies (Fiksel, 1996).!"Modelling a new product or process is difficult and expensive (Lave, Cobas-Flores, Hendrickson and McMichael, 1995). Regarding all these limitations (especially in what concerns the definition of system boundaries) we can easily conclude that to examine the economy-wide environmental implications of a design or product, a model must capture all the economic interdependencies. A model entitled Economic Input-Output-Based Life Cycle Assessment (EIO-LCA) was developed by a group of researchers in Carnegie Mellon University s Green Design Initiative. The EIO-LCA is basically an extension of the input-output analysis described previously, enabling to quantify all the direct and indirect interrelationships among industry sectors of an economic system and their respective environmental burdens. EIO-LCA complements the economic input-output analysis by linking economic data with resource use (such as energy, ore and fertiliser consumption) and/or environmental impact categories (such as greenhouse gas emissions, toxic discharges, ozone depletion potential, hazardous or non-hazardous waste). In the EIO-LCA method, the economic input-output method (equation 10) is augmented with data vectors indicating environmental impacts per unit of output: E i =R i X=R i (I-A) -1 F (13) R = R (1 a11) 0 a21 R 33 a31 a (1 a a ) a a (1 a 33 ) 1 F1 F 2 F 3 Where E i represents the vector of total environmental effects of category i, R i is a matrix of discharges of type i, per monetary unit of sector s output. Environmental impacts can be estimated either for all effects or just for direct supplier impacts: E D =RY=R(I+D)F (14) 20

30 Where E D represents the direct discharges and Y represents the direct economic changes. Using this methodology brings several major advantages, regarding the inventory of environmental discharges, comparing to LCA. This type of analysis is transparent since the method is based on publicly available data, making it cheaper and more efficient to apply than the conventional LCA. An EIO-LCA analysis can be accomplished in a few hours without additional data, once the input-output matrix has been filled out. Furthermore, a comprehensive model of the entire economy is used, so that analysts do not need to draw arbitrary boundaries, ensuring that the full range of direct and indirect effects and their environmental consequences are taken into account. Indeed, one of the main advantages of economic input-output analysis is that it explicitly accounts for all of the direct and indirect inputs to producing a product or service by using the input-output matrices of a national economy. Indirect and feedback relationships among the different processes and economic sectors can be included directly. In summary, within this method the direct economic changes associated with a certain choice are forecast. An economic input-output table is then used to estimate both direct and indirect changes in output throughout the entire economy, for each sector. Finally, the environmental discharges associated with the changes can be assessed by multiplying the output changes by the average level of a pollutant, electricity use or any other type of environmental burden. Hence, this vector of additional discharges characterises the overall environmental impact caused by a specific variation of final demand. Notwithstanding the obvious advantages foreseen for this methodology comparing with the LCA approach, it has also some limitations that ought to be considered, such as:!"the current sectors level of disaggregation may be insufficient for the desired level of analysis, since environmental effects of the entire product mix are considered in the model, thereby leading to potential errors from aggregation (Lave, Cobas-Flores, Hendrickson and McMichael, 1995 and Hendrickson, Horvath, Joshi and Lave, 1998).!"As input-output models include sectors of the economy rather than simple processes, one of the limitations is that the sectors may be too heterogeneous to correctly reflect particular processes (Hendrickson, Horvath, Joshi and Lave, 1998).!"It is difficult to differentiate product types and processes used within any particular industry (Cobas, Hendrickson, Lave and McMichael, 1995).!"The model can be used to reflect fabrication of a product or process but not the environmental impacts arising from use or disposal (Hendrickson, Horvath, Joshi and 21

31 Lave, 1998). Nor the environmental impacts of exports and imports of goods included in the model (Lave Cobas-Flores, Hendrickson and McMichael, 1995).!"The results of input-output models are most accurate when changes in output are relatively small. As changes increase or as new technology is introduced, the model results are likely to be less good approximations of what the economy would deliver (Lave, Cobas-Flores, Hendrickson and McMichael, 1995).!"The input-output matrix employed, in principle could be estimated for any geographic region, but the data gathering and estimation cost might be prohibitive (Lave, Cobas- Flores, Hendrickson and McMichael, 1995). Although there are limitations this method provides a strong and advantageous methodology to access any type of environmental burdens caused by a certain level of production increase or decrease since it uses reliable economic data. The only major limitation might be the quality and quantity of the environmental data available for each one of the economic sectors. The better and more accurate is the data used, the more benefits and reliable conclusions we can take from the model, and more precisely we can use the results to fundament policy actions. 22

32 3 ECONOMIC INPUT-OUTPUT ANALYSIS: THE PORTUGUESE CASE STUDY 3.1 The Portuguese Input-Output Tables Many countries, including Portugal, collect and publish an input-output table for their economies. These tables are used to calculate the additional resources, such as intermediate and final products required for increases in the final demand for specific sectors of the country s economy. In this section the Portuguese input-output tables will be presented, as well as its usefulness in terms of the analysis they allow to perform. Additionally it will be presented a macro analysis of the evolution of the Portuguese economy based on the input-output framework. The growing integration and interdependency of the national economies impose the need of international comparison of the statistical information among different countries, especially in what concerns the national accounts. In the European context this need is even more stressed. Indeed, the national accounts perform, nowadays, an important role in what concerns the economic, monetary and fiscal policy of the European Union, namely in:!"self community resources: - Determination of the total amount of resources based on the Gross National Product (GNP); - The contribution of the member states to the value added tax (VAT) is affected by the National Accounts;!"The decision of the structural funds make use of the regionalised data of the National Accounts;!"The protocol relative to the excessive debits that is annexed to the European Union Treaty uses as reference values the ones determined in the input-output table;!"the contributions of the national Central Banks to the European Monetary Institute are based on the GDP and total population, defined by the National Accounts. Thus, gathering statistical economical data and organising it into an input-output transactions table is crucial either for internal economic analysis purposes or for international comparisons. 23

33 Economic sectors are defined by the agency that gathers the information about the country s economy that assigns a name and a number to each economic sector. In Portugal the national economic input-output tables are compiled by the National Statistics Institute ( Instituto Nacional de Estatística INE) of the Ministry of Planning, for 49 economic sectors. Until 1976, the INE performed the input-output table following the OECD approach. In 1979 the national input-output tables started to be completed according to the European System of National and Regional Accounts (ESA) 2 nd edition (1978). However, the National accounts will soon consider 150 economic sectors, according with the new European nomenclature ESA2000. Nevertheless, the most recent Portuguese transaction table publicly available at the moment dates back to 1995 and includes sectors. Each one of the 49 sectors has a code, known as CAE (Economic Activity Classification) code (Table 2). A new transaction table for 1998 will be released soon, but is still not available. Therefore, the 1995 transactions table is the latest available table one can focus on to make the necessary calculations (Annex 1). The inputs and outputs of this transaction table are stated in 1995 PTE. 24

34 Sectors Denomination 01 Agriculture & hunting 02 Sylviculture & forestry 03 Fishing 04 Coal mining 05 Petroleum Mining and Refinery 06 Electricity, gas and water 07 Metallic mineral mining 08 Non metallic minerals mining 09 Porcelain, faience, etc. 10 Glass and glass articles 11 Other building materials 12 Chemical products 13 Metallic products 14 Non-electrical machinery 15 Machinery, apparatus, etc. 16 Transport vehicles and equipment 17 Slaughter & meat processing 18 Dairy products 19 Conservation of fish and other related products 20 Cooking oil and food fats 21 Cereals & leguminous processing 22 Other food processing 23 Beverages industry 24 Tobacco industry 25 Textile & clothing industry 26 Tanning & leather industries 27 Wood & cork industries 28 Paper, graphics arts & publications 29 Rubber products & articles of plastic material 30 Other manufacturing industries 31 Construction 32 Restoring & repair 33 Wholesale & retail trade 34 Restaurants & hotels 35 Land transport & inland waterways transport 36 Maritime & air transport 37 Transportation-related services 38 Communications 39 Financial services 40 Insurance services 41 House renting 42 Services rendered for companies 43 Commercial services of education & research 44 Commercial services of health& veterinary 45 Other commercial services 46 Non-commercial services of Public Administration 47 Non-commercial services of education & research 48 Non-commercial services of health & veterinary 49 Other non-commercial services 50 Virtual sector Table 2 Portuguese economic sectors. Source: INE,

35 According with ESA (1978), the institutional units, whose operations are described by the National Accounts are denominated resident units. The resident units are those that have a core of interest in the national economic territory. The economic territory considered in the National Accounts encompasses:!"geographical continental territory and the Autonomous Regions of Azores and Madeira, excluding parts of the territory used by foreigner public administrations, European community institutions or other international institutions ruled by international treaties or agreements between States;!"National air space, territorial waters and part of the continental platform located in international waters;!"the territories located in foreigner countries used by the Portuguese public administration by means of international agreements or agreements between States (embassies and Portuguese consulates);!"the mineral deposits located in international waters, outside the continental platform, that are explored by resident units in the territory, as defined previously. ESA defines the resident units in a country as follows:!"productive, financial, insurance and redistributing units;!"consuming units;!"land and building owners (exclusively to operations related to this activity). The production represents the result of the economic activity of each resident unit, which composes the production of goods and services in a certain period of time. The production is evaluated at factory prices and therefore includes all the taxes related to production free from deduction and can be divided into:!" Production of goods;!" Production of commercial services, except financial ones;!" Production attributed to financial services. Production of goods include: production of new goods for commercial trade, production of goods for interconsumption, production of agricultural and alimentary goods to be auto 26

36 consumed by the families, production for one s own account of fixed capital goods and all the production that the producing units give to their employees as a way of remuneration. Production of commercial services includes all the services that can be trade in the market, and that are produced in units, which profits arise from their production. The non-commercial production embraces the domestic services produced by the families for their own profit and the collective services that are provided for the community or for groups of families in a free or almost free way. The intermediate consumption is the value of all goods and commercial services consumed in a certain period of time in order to produce other goods and services. This type of consumption is evaluated by the acquisition price. The final consumption is the value of goods and services used for private satisfaction, being evaluated also by the acquisition price. Therefore, this type of consumption includes the final consumption of families (or private consumption) and the collective consumption of the public and private administration. The gross formation of fixed capital represents the value of durable goods, designed for non-military purposes, acquired by the resident production units to be used for more than a year in their production process, augmented by the value of services incorporated in the fixed capital goods. The change in stocks represents the difference between the input and output in stocks, in a certain period of time of every goods that are not included in the fixed capital. By convention, it is assumed that the families and public and private administration consume immediately all the goods they buy, with exception of those that constitute strategic stocks. The exports of goods and services:!"exports of goods include all the goods that that freely or not leave definitively the country economic territory, with destination to the rest of the world.!"exports of services include all the services (transports, insurance, etc.) provided by resident units to non-resident units. Imports of goods and services:!"imports of goods include all the goods that, freely or not, enter definitively the Portuguese economic territory from the rest of the world.!"imports of services include all the services (transports, insurance, etc.) provided by the non-resident units to the resident units. 27

37 Similarly to other countries the Portuguese input-output table encompasses six elements:!"domestic intermediate consumption;!"imported goods;!"domestically-sourced investment goods;!"sub-matrices of final demand vectors for expenditures on both domestic and foreign products;!"the sub-matrix of value-added sectors. Therefore, the national input-output table format can be schematised in the next figure (Figure 1): Transactions Table Private Exp. Govenment Exp. GFCF Change in stocks Exports Gross Output Imports Compensation of employees VALUE ADDED Operating Surplus Depreciation of Capital Net indirect taxes Total Inputs Figure 1 - Input-Output System Schema. Source: Based on OECD (1998). Observing the national input-output transactions table (Annex 1) one can see that it isn t a square matrix, having an additional sector (sector 50). This is explained by the fact that in the Portuguese table, the production imputed to the financial and banking sector (sector 39) is measured, conventionally, through the difference between the income/revenue received by the credit institutions, except the ones providing from the application of their own funds, and the amount of interests paid to their creditors. This production is totally reserved for the intermediate consumption of a fictitious sector (sector 50), whose production is null, thus having a negative gross value added (GVA). As it was mentioned before, the Portuguese most recently available transactions table, at the moment of this study, dates back to 1995 (Annex 1) and analysing it (Figure 2) one can 28

38 conclude (by noting the principal diagonal of the picture below) that, in average, the major contribution to each sectors output is done by the sector itself. Therefore, in order to produce for final demand each sector has to use as input its own production Figure 2 Portuguese input-output transaction table (1995). Values in 10 6 PTE Source: INE, Input-output tables 1990 and From the transaction table, is possible to determine the technical coefficients table following the equation 3. The technical coefficients table (Figure 3) provide the production function of the producing sectors as it quantifies the inputs coming from each one of the other producing sectors that one certain sector need to produce one monetary unit of output. For instance, for the Agriculture and Hunting sector (sector 1) to produce one PTE of output, requires an input PTE from the sector itself, 0.1 PTE from the Petroleum sector (sector 5), 0.37 PTE from the Other Food Processing sector (sector 22), and the remain 0.3 PTE from the rest of the economic sectors. 29

39 Figure 3 Portuguese technical coefficients table (1995). The interdependence coefficients matrix, or the inverse Leontief matrix - (I-A) -1 - measure the direct and indirect output levels from each producing sector of the economy required to satisfy given levels of final demand. Observing a representation of this matrix for Portugal one can see, as expected, that the petroleum and electricity sectors (sector 5 and 6) contribute highly on inputs to the others sectors. In fact, economic growth is arguably the most important driver of energy demand, since all production is strongly dependent on energy consumption (Figure 4). Figure 4 Portuguese interdependence coefficients matrix (1995). 30

40 3.2 Evolution of the Portuguese Economy ( ) The analysis here performed is based on the reference years of 1990 and The year of 1995 was chosen for obvious reasons, since it is the most recent year for which the transaction table for Portugal is available. The choice of 1990 was made to evaluate structural changes in the Portuguese economy for a five-year period, and mainly because it is the reference year established in the Kyoto Protocol. As the emissions of GHGs are strongly correlated with the energy use, and energy consumption is associated with economic development, it is useful, at this stage, to understand the evolution of the Portuguese economy between 1990 and 1995, in order to better foresee the economic evolution in the years to come. In the period between 1990 and 1995, the behaviour of the relevant macroeconomic indicators, such as those represented in figure 5, show an almost constant trend for an increasing of the private consumption and a growing decrease verified in the Portuguese economy since 1990, with a special incidence in PTE Private Consumption Imports of goods and services Exports of goods and services GFFC Figure 5 Principal supply components (at constant prices of 1995). Source: INE, Input-output tables from 1990 to

41 In the second trimester of 1994, the economic recovery began, which increased in 1995 (Seixas, 2000). The analysis of the national input-output tables contributes to assess the evolution of the Portuguese economic structure and performance over a specific period of time. As it is illustrated in the figures 6 and 7, which contain data obtained from the national input-output tables, there was a general increase in the total output of the Portuguese economy between 1990 and 1995, and almost all the sectors verified an increase in their production, with the important exceptions of Agriculture and Hunting, Petroleum, Chemical, Non-electrical Machinery and the Textile sectors, as represented in figure 7. Agriculture & hunting Sylviculture & fo restry Fishing Coalmining Petroleum Electricity,gas and water Metallic mineralmining Non metallic minerals mining Porcelain,faience,etc. Glass O ther building m aterials C hem icalproducts Metallic products Non-electricalm achinery M achinery,apparatus,etc. Transport vehicles and equipment Slaughter & m eat processing Dairy products C onservation of fish Cooking oiland fo o d fats C ereals & legum inous processing O ther food processing B everages industry Tobacco ind ustry Textile & clothing Tanning & leather Wood & cork Paper,graphics arts & publications Rubber & plastic materials Other m anufacturing industries C o nstruction R estoring & rep air Wholesale & retailtrad e R estaurants & hotels Land transp o rt & inland w aterw ays transp o rt Maritime & air transport T ransp o rtatio n-related services Communications Financialservices Insurance services House renting Services rendered for com panies Commercialservices of E&R Commercialservices of health& veterinary O ther commercialservices Non-commercialservices of PA Non-commercialservices of E&R Non-commercialservices of health & O ther non-com m ercialservices PTE Figure 6 Total output by economic sector in 1990 and 1995 (prices of 1995). Source: INE, Input-output tables 1990 and

42 (10 6 PTE) Figure 7 Total output variation between 1990 and 1995 (prices of 1995). Source: INE, Input-output tables 1990 and The contributions of the main economic sectors to the national output did not observe significant changes between 1990 and 1995, as represented in figure 8, but the increase of the services sector contribution to the gross value-added (GVA) is worth mentioning. 33

43 Agriculture & hunting, sylviculture and fishing 4.3% 6.7% Industry 40.2% 38.4% Services 53.1% 57.3% Figure 8 Contribution of Agriculture, Industry and Services sectors to national gross value-added (% of GVA). Source: INE, Input-output tables, 1990 and This is particularly important as the Services sectors are contributing with more than 50% to the GVA structure, followed by the Industry sectors. There is a widely held belief, which asserts that services offer more opportunities for growth than manufacturing product-based industries (P. Castello and A. Soria, 1997). There is no doubt that the role of services has increased substantially in contemporary economies, in terms of their output, employment, and importance as inputs to other sectors. In most European Union member states nowadays, service activities provide around twothirds of all jobs and GDP due to the dynamic innovative capacity of many newly emerging service sectors (EIMS, 1998), as it can be seen in the table below. 34

44 Country % of GDP derived from: Agriculture Industry Services Luxembourg Belgium Denmark Austria Germany France Netherlands Italy UK Sweden Finland Ireland Spain Portugal Greece Source: EUROSTAT, Table 3 - Share of GDP per Sector in European Countries in Portugal follows these European tendencies towards increasing economic contribution of services, either technological and knowledge intensive services or with no technological knowledge associated (traditional professional services). The services that have higher contribution for GVA are the Wholesale and Retail Trade sector, the Financial Services sector and the Services Rendered for Companies sector, although the first two sectors are decreasing their contribution, if we compare 1990 with 1995 (Figure 9). 2 In (Oliveira, 1998) 35

45 Wholesale & retail trade Restaurants & hotels Land transport & inland waterways transport Maritime & air transport Transportation-related services Communications Financial services Insurance services House renting Services rendered for companies Commercial services of education & research Commercial services of health& veterinary Other commercial services Non-commercial services of Public Administration Non-commercial services of education & research Non-commercial services of health & veterinary Other non-commercial services Figure 9 Contribution of Services sectors to national gross value-added (% of GVA). Source: INE, Input-output tables, 1990 and The reduction of the weight of Agriculture, Sylviculture and Fishing as quantified in figure 10 can be justified by the Portuguese adhesion to the European Union, due to the production targets established in the Common Agricultural Policy (Banco de Portugal, 1994, 1996) 3. 3 In (Seixas, 2000). 36

46 Agriculture & hunting Sylviculture & forestry Fishing Figure 10 Contribution of Agriculture, Sylviculture and Fishing sectors to national gross value-added (% of GVA). Source: INE, Input-output tables, 1990 and On the other hand, the analysis of figure 11 shows that the industry sectors that provide the major contributions for GVA in Portugal are the Utility sector, Textile and Clothing sector and the Construction sector. Coal mining Petroleum Mining and Refinery Electricity, gas and water Metallic mineral mining Non metallic minerals mining Porcelain, faience, etc. Glass and glass articles Other building materials Chemical products Metallic products Non-electrical machinery Machinery, apparatus, etc. Transport vehicles and equipment Slaughter & meat processing Dairy products Conservation of fish and other related products Cooking oil and food fats Cereals & leguminous processing Other food processing Beverages industry Tobacco industry Textile & clothing industry Tanning & leather industries Wood & cork industries Paper, graphics arts & publications Rubber products & articles of plastic material Other manufacturing industries Construction Restoring & repair Figure 11 Contribution of the Industry sectors to national gross value-added Source: INE, Input-output tables, 1990 and

47 Input-output tables can also be used to assess technological change, although this is a very complex topic that is related to a wide range of other economic and social phenomena, with inventive and innovative activities involving a variety of phenomena, which are difficult to conceptualise and measure in simple models (Archibugi and Michie, 1998). Each sector industry has its own cooking recipe, which is determined mainly by technology. Technology in a real economy changes slowly over the periods of time usually involved in economic forecasting and planning (Leontief, 1986). Therefore, it is generally assumed constancy in technical coefficients in the short-run. In fact, this is one of the assumptions of input-output analysis that the technical coefficients can be assumed constant over a short period of time. The perception of the changes in input structure of the industry, due to changes in prices or technology, can be achieved through comparing different years technical coefficients matrices. Since a column vector of input coefficients represents the technological structure of each sector of the economy, technological change can be described concisely as a change in the magnitudes of the elements of these vectors. Figure 12, quantifies the change in the technical coefficients of the Portuguese economy between 1990 and Figure 12 Variation in the Portuguese technical coefficients

48 In fact, figure 12 identifies the sectors for which major technological or production changes occurred between 1990 and For instance, figure 13 shows that the Cooking Oil and Food Fats sector needed, in 1995, higher percentage of inputs from Agriculture & Hunting sector when compared to 1990 (71%). On the other hand, it became less dependent of the Chemicals sector compared with 1990 (-28%) Agriculture Chemical Products Other Figure 13 Technical coefficient change in the Cooking Oil and Food Fats from 1990 to The Fishing sector, to produce the same output, required more inputs from the Other Food Processing sector (1044%) and Transportation Related Services sector (467%), in 1995, than in 1990 (Figure 14). One curiosity is that the Fishing sector in 1995 was less dependent on the Petroleum sector (-47%) than it was five years before and this may be associated with the fact that the fisheries were done closer to the coast, or due to a productivity increase Petroleum Other food processing Transportation-related services Other Figure 14 Technical coefficients change in the Fishing sector between 1990 and

49 The sectors of Land Transport and Inland Waterways Transport, and Maritime and Air Transport required in 1995 more inputs from the Services Rendered for Companies sector (to produce one unit of output), respectively more 128% and 102%, than they used to in 1990 (Figures 15 and 16). This shows a change in the production structure of the Portuguese economy, contradicting the theory that the technical coefficients remain almost the same over a short period of time Petroleum Transport vehicles and equipment Land transport Services rendered for companies Other Figure 15 Technical coefficients change in the Land Transport sector between 1990 and Petroleum Maritime and air transport Transportation-related services Services rendered for companies Other Figure 16 Technical coefficients change in the Maritime and Air Transportation sector between 1990 and

50 The main evidence we can take from this level of analysis is that the Portuguese economy is oriented towards services, as the industrial sectors are becoming more dependent of the services sector. 41

51 4 ENVIRONMENTAL INPUT-OUTPUT ANALYSIS: THE PORTUGUESE CASE STUDY The state of the environment is currently a major world-wide concern. Pollution, in particular, is perceived as a serious threat mainly in the industrialised countries, where quality of life is synonymous of growth in material output. Meanwhile, environmental degradation has become a serious factor to take in consideration when defining the economic development and the alleviation of poverty in the developing world. The growing evidence of environmental problems is due to a combination of factors. Over the last three decades the environmental impact of human activities has grown considerably on account of the increase in economic activity, population and per capita consumption. This section focuses on the greenhouse gas (GHG) emissions as a case study since they contribute to one of the most serious environmental problems the world faces nowadays - the climate change. Although the role of GHGs in climate change is not unanimous among some scientific experts the reality is that the average global temperature is increasing at a quick rate and almost all Nations are concerned about this issue and willing to take political actions to revert this tendency. Many countries are now making efforts to stabilise greenhouse gas emissions at 1990 levels. In this context, emissions inventories represent a critical first step towards the development of policies and strategies to mitigate greenhouse gas emissions. Once the emissions of various GHGs have been inventoried and assigned to specific economic activities, policy makers may identify and assess various options for reducing those emissions. This study propose the use of input-output analysis methodology to calculate the expected increase in the GHGs in the coming years, comparing the results with the levels agreed in the Kyoto Protocol. This thesis is aimed at demonstrating that this methodology is a powerful and advantageous tool to assess the changes of any type of environmental burden generated by a change in the final demand and to provide useful inputs for decision-making. In fact, the use of the input-output framework has the major advantage of considering all the direct and indirect economic effects and avoiding the settlement of arbitrary boundaries. The GHGs evaluation for year 2010 will contribute to evaluate the position of Portugal when compared to the targets agreed by the European Union in Kyoto. To achieve these proposes the next sections start by reviewing some concepts about the GHGs, their consequences to the global warming, and the international political context and background concerning this matter. Subsequently, the greenhouse gas emissions in Portugal will be characterised, for the reference years of 1990 and 1995 and the consequent Global 42

52 Warming Potential (GWP). Based on this information, the emissions for 2010 will be estimated based on a certain forecast of change in the final demand and compared to what was established in the Kyoto Protocol, for Portugal. The methodology presented in this work is a trade-off between the need for reliable results and the data limitations, concerning the GHGs emissions. 4.1 Global Warming Theoretical Overview Solar radiation interacts with the surface of the earth in several ways. Some portion of this energy is reflected back into space by the earth's atmosphere, another portion is dispersed and scattered by the molecules in the atmosphere and a large portion penetrates through the earth's atmosphere to reach the surface of the earth. The radiation reaching the earth's surface is largely absorbed resulting in any atmospheric warming. Figure 17- Solar radiation interaction with the surface of the earth. Source: "Energy Futures", a publication of the Natural Resources Defence Council and Uncommon Sense, Inc. ( 43

53 Much of this absorbed energy is re-radiated in longer infrared wavelengths. As it leaves the earth, it interacts with the atmosphere. Some of this re-radiated energy escapes to space, but much of this re-radiated energy is reflected back to the earth's surface by molecules in the earth's atmosphere. This reflected energy further warms the surface of the earth. The molecules responsible for this phenomenon are called greenhouse gases. These gases act like the glass in a greenhouse, trapping re-radiated energy and they are essential for humankind because they act as a surrounding shield that enables the terrestrial surface to be around 30ºC warmer than it would be. Greenhouse gases include water vapour (H 2 O), carbon dioxide (CO 2 ), methane (CH 4 ), nitrous oxide (N 2 O), ozone (O 3 ) and several classes of halocarbons that contain fluoride, chlorine, and bromine. Human activity has modified the equilibrium of these atmospheric gases. Increasing the concentration of these gases in the atmosphere increases the atmosphere's ability to block the escape of infrared radiation. Therefore, increasing the concentration of greenhouse gases can have dramatic effects on climate and significant repercussions upon the world around us. Climates suitable for human existence do not exist simply above some minimum threshold level of greenhouse gas concentration, rather they exist within a finite window - a limited range of greenhouse gas concentrations that makes life as we know it possible. Several literature states that if the GHGs emissions continue to increase at the same rate they used to, the CO 2 atmospheric levels will duplicate in this century comparatively with the preindustrial levels and others are even more pessimistic predicting that if no action is taken the GHGs concentration will triplicate around year According to the IPCC report (IPCC, 1995) there will be an increase in the global warming of 1-3.5ºC in the next 100 years, and consequently an increase in the sea level of around 15-95cm (Seixas, 1999). Carbon dioxide is considered the principal greenhouse gas. Stabilisation at 1990 levels in year 2000 would have required a 20 per cent reduction in global carbon dioxide emissions relative to a business-as-usual scenario (Chisholm, Moran and Zeitsch 4 ). According to the 1990 scientific assessment by the Inter-governmental Panel on Climate Change, stabilisation of the carbon dioxide concentrations in the atmosphere at present days level would require reductions in annual emissions from human sources of more than 60 per cent. 4 in (Oates, 1996) 44

54 In this context, it is clear that any action to stabilise carbon dioxide concentrations will involve large-scale changes in production processes, consumer behaviour and international trade. Some existing studies strongly connect the temperature change with the increase of CO 2 concentration in the atmosphere. Through the study of ancient ice cores from Antarctica both the concentration of carbon dioxide in the atmosphere and Global Mean Annual Temperature can be determined for the past 160 thousand years of the earth's history. By examining the graph of Global Mean Annual Temperature and Atmospheric Carbon Dioxide Concentration over this time period (Figure 18), it seems quite evident that the two levels are related. Figure 18 Atmospheric carbon dioxide concentration and temperature change. Source: The White House Initiative on Global Climate Change (Barnola et al). However, some solar scientists disagree with this theory and argue that the global warming might be caused, wholly or in part, by a periodic but small increase in the Sun s energy output rather than by the increase in the concentration of greenhouse gases in the atmosphere. In fact, an increase of just 0.2% in the solar output could have the same effect as doubling the carbon dioxide in the Earth s atmosphere (Stanford Solar Center). Actually, many scientists have observed correlations between the solar magnetic activity, which is reflected in the sunspot frequency, and the climate parameters at the earth (Figure 19). 45

55 Figure 19 Solar activity versus climate. Source: Friis-Christensen, E., and K. Lassen, "Length of the solar cycle: An indicator of solar activity closely associated with climate," Science, 254, , 1991 ( The solid dots curve illustrates the solar activity, which is generally increasing through an interval of 100 years. Within the same interval the Earth s average temperature as indicated by the empty dots curve has increased by approximately 0.7ºC. Nevertheless, one can also observe that the concentration of carbon dioxide in the atmosphere and the mean annual global temperature have been increasing since the end of the last ice age approximately 10,000 years ago (Figures 20 and 21). Figure 20 CO 2 concentration. Source: The White House Initiative on Global Climate Change (Neftel et al & Keeling). 46

56 Figure 21 Global average temperature. Source: The White House Initiative on Global Climate Change (J. Hansen et al). Despite the fact that this growing of the global temperature goes back long time ago, the most recent increases should be seen with some concern, because they are occurring at rates that have not been observed since the last ice age (IPCC, 1995) and have only previously been observed in association with dramatic shifts in climate. Moreover, the dramatic increase in carbon dioxide concentration in the atmosphere over the past 150 years (from about 280 parts per million to about 360 parts per million) is largely due to anthropogenic (human-caused) effects (IPCC, 1995). After several years of investigation and the consultation of thousands of scientists, the Intergovernmental Panel on Climate Change (IPCC), concluded that the balance of evidence suggests a discernible human influence on global climate. In addition to the extensive investigation and clear conclusion by the IPCC, in the summer of 1997 a letter was signed by 2,600 scientists calling for the United States to take a leadership role in reducing greenhouse gas emissions and preventing the onset of intense, continuous, global warming. As predicted by the reports of the IPCC, the climate has indeed been changing. The ten hottest years in the past century have all occurred since 1980, with 1997, 1995, and 1990 being the hottest years on record. Data collected by NOAA (National Oceanic and Atmospheric Administration) (Figure 22) indicate that 1998 was by far the warmest year in recorded history. Global mean surface temperature in 1998 was 0.66 C above the long-term ( ) average value of 13.8 C. It is very possible for a particular year to be the warmest year on record and not be warmest on record for any single month. However, for 9 of the 12 months of 1998 the global average 47

57 temperature has exceeded the monthly records for all previously recorded years. In other words, in the 100+ years that temperature data have been recorded, there has never been a warmer January, February, March, April, or May, June, July, August or October than in In addition, it's worth noting that the previous monthly records had all been established between 1988 and Figure 22 - Global average temperature. Source: National Oceanographic and Atmospheric Association, 1999 ( Throughout 1998 we heard continuous reports about the severe weather that occurred around the world as a result of El Niño. Scientists once believed that El Niños occurred once every 5-7 years. Now they seem to be occurring every 3-5 years. The 1990 to mid 1995 persistent warm-phase of the El Niño - Southern Oscillation was unusual in the context of the last 120 years (IPCC, 1995). While the concentrations of almost all greenhouse gases have been increasing since the Industrial Revolution, carbon dioxide has had the greatest effect on changing the climate. During the 1980's humans released 5.5 billion tons of carbon dioxide into the atmosphere annually by burning fossil fuels (coal, oil, natural gas) for heat, transportation, and electricity. An additional 1.6 billion tons were released from anthropogenic (human-induced) changes in land-use (i.e. clearing land for agriculture, pastures, etc.) mostly through deforestation in the tropics. Around 2 billion tons of the 7.2 billions of tons released are taken up by a presently unidentified "sink" or reservoir of carbon and the ocean takes up approximately 2 billion tons a year. This leaves a remainder of 3.2 billion tons of CO 2, and global atmospheric 48

58 measurements indicate that this amount is simply being added to existing concentrations already present in the atmosphere. The result is that the atmospheric concentration of carbon dioxide is increasing at a rate of approximately 1.5 ppm (parts per million) per year and overall it has increased about 30% since the beginning of the Industrial Revolution. The CO 2 expelled into the atmosphere through these activities does not disappear immediately. As a matter of fact, the residence times of greenhouse gases in the atmosphere are on the order of decades to centuries. This means that the CO 2 we emit today will likely be affecting the climate well into our children's future and likely into the futures of our grandchildren. Despite the widespread recognition of this fact, world-wide emissions of fossil fuels continue to increase at a rate of about 1% per year (IPCC, 1995). Emissions will increase even further as the developing world moves towards greater industrialisation. As of 1995 the industrialised world (the United States, Western Europe, Eastern Europe, and the Former Soviet Union) contributed more than 70% of the total world emissions. If use of fossil fuels continues to increase at present rates, by 2035 humans will annually be contributing 12 billion tons of CO 2 to the atmosphere, about 50% of which will be due to developed nations and about 50% of which will be due to developing nations (IPCC, 1995). Despite, there isn t a clear link between the recent relatively short-term climatic events and the amount of greenhouse gases humans have been emitting to the atmosphere in the past 150 years in the face of uncertainty we shouldn t hesitate to act. Based on these disconcerting evidences, world-wide governments have been trying to discuss these issues and take effective policy actions to revert this tendency Political Overview International Actions Reacting to the evidence that human activities are increasing concentrations of greenhouse gases in the atmosphere, in 1987, the Intergovernmental Panel on Climate Change (IPCC 5 ) was formed by the United Nations Environmental Programme (UNEP) and the World Meteorological Organisation (WMO), "to assess the available scientific, technical and socio

59 economic information in the field of climate change." After 1990, the Intergovernmental Panel on Climate Change (IPCC) issued a series of reports indicating that carbon dioxide, methane, and other greenhouse gases, which are being emitted into the atmosphere in ever greater amounts due to human activities, have the potential to cause serious climate disruption. The first IPCC report was released in 1990 and it called for immediate action to avoid the effects of a warming climate. This report was supported by representatives at the Second World Climate Conference, which occurred later that same year. Immediate negotiation of a framework convention on climate change was called for by the representatives of this second climate conference. The United Nations General Assembly created a committee to draft a treaty for the upcoming Earth Summit held in Rio de Janeiro, in June That treaty, now known as the United Nations Framework Convention on Climate Change (UNFCCC 6 or the Climate Treaty), was subsequently accepted and formally signed by 154 countries and the European Community represented at the United Nations Conference on Environment and Development. The stated objective of the Convention was the stabilisation of greenhouse gas concentrations in the atmosphere at a level which would prevent dangerous anthropogenic interference with the climate system. It goes on to state "such a level should be achieved within a time-frame sufficient to allow ecosystems to adapt naturally to climate change and to insure that food production is not threatened and to enable economic development to proceed in a sustainable manner." As a result, all the parties were committed to develop and actualise the anthropogenic GHGs emissions inventory that weren t controlled by the Montreal Protocol. The methodologies adopted to perform the inventories, in the scope of the Convention, have been being developed by the IPCC in order to constitute a common comparable base among different countries. Countries ratifying the convention agreed: 1. To develop programs to slow climate change 2. To share technology and co-operate to reduce greenhouse gas emissions 3. To develop a greenhouse gas inventory listing national sources and sinks

60 At the Earth Summit, it was generally agreed that the responsibility falls upon the developed nations to lead the fight against climate change, as they are largely responsible for the current concentrations of greenhouse gases in the atmosphere. The original target for emission reductions that was generally accepted in 1992 was that the developed nations should, at a minimum, seek to return to 1990 levels of emissions by the year Additionally, developed nations should provide financial and technological aid and assistance to the developing nations to produce inventories and work toward more efficient energy use. The parties to the convention agreed to convene again in Kyoto, Japan in 1997 to implement legally binding agreements on greenhouse gas emissions. Additionally, the IPCC second report in 1995 stated that the balance of evidence suggests that there is a discernible human influence on global climate (IPCC, 1995) and constituted an important document for the Conference of Parties held in Geneva (COP-2). In 1997, during the Conference of Parties held in Kyoto (COP-3) a Protocol known as the Kyoto Protocol was adopted by consensus. This Protocol engage the industrialised countries to reduce their overall GHGs emissions by at least 5% below 1990 levels in the commitment period 2008 to 2012 (see Annex II, Kyoto Protocol, article 3). The institutional framing of the greenhouse gas emissions is shown in the next figure (Figure 23). Human Activities Greenhouse Gases Global Warming Kyoto Protocol Implementation ( ) Climate Change COPs IPCC, st Report COP-3 Kyoto, 1997 Kyoto Protocol UNFCCC 1992 IPCC, nd Report Figure 23 International institutional context of climate change. Source: Seixas,

61 Interest in the market mechanisms of the Kyoto Protocol increased sharply following the fourth UNFCCC Conference of the Parties, held in November 1998, in Buenos Aires, Argentina (COP-4). One factor contributing to this increasing interest was the growing awareness, amongst nations, that emissions trading can play a critical role in achieving emissions reductions at lower cost by providing incentives for competitors to develop innovative, cost-effective emissions reduction technologies and processes. Another factor is the announcement by non-annex B nations, such as Argentina, that they plan to adopt commitments to limit greenhouse gas emissions and that they are interested in participating in emissions trading. Other non-annex B nations also have a growing interest in the potential of emissions trading to provide a new source of capital for cleaner, more environmentally sustainable development. A third factor is the interest of a number of countries in the development of domestic programs that allocate transactable emissions credits to companies and communities that move early to reduce emissions. There are inherent conflicts of interest related to the issue of climate change. Traditional points of digression between developed and developing nations of the world become overwhelmingly apparent during climate change negotiations. The developed world has a relatively high standard of living in comparison to the developing world. The developed world is largely responsible for the current dangerous levels of greenhouse gases in the atmosphere, yet the developing world will likely be hit the hardest by the outcomes of climate change. Concern about the rates of population growth and future industrial growth in developing nations has caused industrialised nations to demand that developing nations be bound by any agreement on emissions reductions. The developing nations argue that they don't possess the economic or technological resources to buy into an agreement yet. They see the demands of the developed nations as an attempt to stifle their economic and industrial growth, while they are desperately striving for a higher standard of living and a better life. In November 2000, 180 countries held again in The Hague in the 6 th Conference of Parties (COP-6) after the COP-5 in Bonn, Germany one year before to discuss the climate change issue and define the rules to be followed, which are what misses for the developed countries to ratify the Protocol. However, they couldn t agree about the rules to reach a reduction in the greenhouse gases showing that this problem is far from reaching a consensus solution. This can imply that there are deep disagreements about the way to apply the Kyoto Protocol. 52

62 The Kyoto Protocol As it was mentioned previously, in December of 1997 the countries, which met in Rio, convened in Kyoto to develop a set of legally binding agreements on the reduction of greenhouse gas emissions. Prior to the conference several developed nations had made proposals outlining the extent to which reductions should take place. The U.S. proposed that nations should be required to stabilise their greenhouse gas emissions at 1990 levels in the interval The European Union proposed that nations should be required to reduce their emissions to 15 % below 1990 levels by the year Kyoto was not just a meeting of delegates sent by each nation to discuss and draft a greenhouse gas reductions agreement, but rather it was a collection of representatives from every organisation with a vested interest in the outcome of the agreement, from lobbyists for oil and coal corporations, to the directors and chairmen of NGO's (non-governmental organisations) like Greenpeace and the World Wildlife Fund, to ecologists and climatologists studying the issue of warming, to the handful of greenhouse sceptics, to numerous representative from the U.S. Congress. The risks in this type of agreement are high and the chasm between the developed and developing nations becomes much wider and more apparent. After 10 days of discussion and sometimes heated debate, the delegates at the Kyoto Conference reached an agreement. The Kyoto Protocol calls for the reduction of greenhouse gas emissions for several industrialised nations (see Annex II, The Kyoto Protocol) below 1990 levels by The U.S. agreed to a 7% reduction, and the European Union and Japan agreed to 8% and 6% reductions, respectively. Twenty-one other industrialised nations will meet similar binding targets. For instance, Canada, Hungary, Japan and Poland, agreed on a reduction of 6%, Russia, New Zealand and Ukraine should stabilise their emissions to 1990 levels, while Norway may increase their GHGs emissions in about 1%, Australia in 8% and Iceland in 10%. The objective of each country should be reached between , being calculated as the average of the five years. The reductions concerning the three most important GHGs (CO 2, CH 4 and N 2 O) should be made comparatively with 1990, whereas for HFCs, PFCs and SF 6 the reference year may be Each country has flexibility in the way they can reduce their emissions. Besides the development and adoption of policies and in-house measures, the Protocol anticipate three types of mechanisms:!"international Trade of Emissions!"Joint Implementation 53

63 !"Clean Development Mechanism The Protocol allows for the trading of "emissions quotas" among industrialised nations, a significant victory for the United States. Emissions trading would allow nations that failed to meet their binding targets to purchase emissions credits from nations that had emissions levels that were lower than their required targets. This would allow a nation like the U.S. that has high emissions levels, but also a lot of capital, to satisfy the agreement. However, despite adamant opposition by the U.S. and other industrialised nations, the Protocol also indicated that there would be no binding commitments required of developing countries. While the Climate Treaty (UNFCCC) establishes no legally binding limit on GHGs emissions, the Kyoto Protocol additionally to that treaty establishes cumulative (five-year), legally-binding caps on the anthropogenic emissions of GHGs by some thirty-nine industrialised nations, with the caps to take effect for the years The nations and their allowable amounts of emissions are listed in Annex B of the Protocol, and these nations are often referred to as "Annex B" nations. The Kyoto Protocol places responsibilities on Annex B nations to report on their greenhouse gas emissions annually, and to limit their greenhouse gas emissions to the levels established in Annex B. These responsibilities are quite significant. Never before have the industrialised nations of the world collectively committed to limit emissions of such a broad range of gases so closely linked with such a broad range of economic activity. Energy production and consumption, transportation, manufacturing, construction, agriculture, forestry -- each of these sectors is associated, to varying degrees, with the emission of GHGs. Implementing the Protocol's obligations may trigger significant changes in the way human societies engage in these activities. While the Kyoto Protocol imposes these responsibilities, it also establishes a set of prerogatives or "transactable rights." The Protocol allocates to each Annex B nation "assigned amount units" (AAUs) of GHG emissions equal to that nation's allowable GHG emissions under its legally binding cap. The Protocol then affords Annex B nations, the unregulated right to trade or transact these AAUs. The Protocol also accords two or more Annex B nations that undertake joint co-operative projects -- projects that reduce emissions from the territory of one of the nations -- the right to transact the "emissions reduction units" (ERUs) that result from those projects. Furthermore, the Protocol confers upon nations that are not members of Annex B the right to receive certified emissions reduction units (CERs) for projects in their territories that reduce 54

64 emissions below what would have occurred in the absence of the projects. The Protocol specifies that these CERs are also fully transactable and accords Annex B nations the right to use such CERs in meeting the Annex B nations' emissions targets. Accounting provisions in the Protocol specify that Annex B Parties that transfer AAUs and ERUs to other Parties must subtract the units from their total assigned amounts; Annex B Parties that receive AAUs, ERUs, and CERs may add these to their total assigned amounts. An additional article in the Kyoto Protocol affords Parties the right to form so-called "bubble" or "umbrella" groups, in which the collectivity adopts a joint commitment to limit GHG emissions, and some Parties agree to re-allocate assigned amounts to others. In the event the collectivity fails to meet its commitment, the Protocol holds each member of the group responsible for meeting its commitment under the re-allocation agreement. The fifteen member states of the European Union (EU) have indicated that they plan to fulfil their Protocol commitments through this type of re-allocation of Protocol responsibilities. In short, the Kyoto Protocol establishes a set of sovereign responsibilities to limit GHG emissions to specified levels. It further establishes a set of GHG emissions allowances for each Party that has accepted these responsibilities, and it affords parallel opportunities to create similar, but not identical, allowances by Parties that have not accepted such responsibilities. Finally, the Protocol allows Parties to transact these allowances. The AAUs allocated to Annex B Parties under the Protocol exist only because the Protocol has created them. They cannot be produced by any other means. CERs and ERUs can be "produced," but are only legally cognisable in the Kyoto Protocol context if produced under the legal structures established by the Protocol. Under the Clean Development Mechanism (CDM), an Annex B Kyoto Protocol Party may provide financial payments to a non-annex B Party to assist the latter in achieving sustainable development and to provide to the former a share of CERs resulting from emissions reduction projects in the non-annex B Party's territory. Therefore, by allowing the mechanisms of the Kyoto Protocol to operate fully, without unnecessary restraints, the Parties can allow the Protocol to achieve its greatest potential for reducing GHG emissions. 55

65 4.2 Prospective Analysis for Greenhouse Gas Emissions in Portugal Portuguese Greenhouse Gas Emissions In 1997, the Portuguese government produced a report to be submitted to the Conference of the Parties to the Framework Convention on Climate Change. This report contains inventories of the anthropogenic emissions of the following pollutants: carbon dioxide (CO 2 ), methane (CH 4 ), nitrous oxide (N 2 O), nitrogen oxides (NOx), non-methane volatile organic compounds (NMVOC), and carbon monoxide (CO). By decision of the Ministries Council (72/98) it was created in 1998 the interministerial Commission for the Climate Change in which several ministries are represented, namely the responsible for transportation, industry and energy, agriculture and forestry, finance, and the science and technology sectors. The Environmental Ministry supervises this commission and its objective is to promote and define a coherent strategy concerning the climate change and above all the implementation of the Kyoto Protocol. Although Portugal have formally signed the Protocol as one of the countries in the Annex I, allowing emissions of 92% in the period between comparatively to the 1990 s levels, the Portuguese obligations vis-à-vis the Kyoto Protocol are the same as those the other European Union countries have. In this context, Portugal real obligations are those established by the European Union to all the member states. In June 1998, the European Union Member States agreed a system of burden sharing or target sharing, as the means to achieve the global reduction objective signed in Kyoto. In this context, it was established that Portugal could increase the 1990 s Global Warming Potential in 27% by (Table 4). Meaning that by year 2010 Portugal cannot exceed in more than 27% the global warming potential verified in

66 Greenhouse Gases % GWP 1990/( ) CO N 2 O + 4 CH 4-3 GWP HFCs+PFCs+SF GWP2 (Kyoto) +27 EU15-8 Table 4 Reduction target of GHGs emissions for Portugal, according with the burden sharing policy defined by the European Union. NOTE: GWP Global Warming Potential Source: Seixas, At the European level, Eurostat (the organisation responsible by the statistics of the European Union) have been promoting the inclusion of environmental accounts into the national accounts. These matrixes are called NAMEA (National Accounting Matrix including Environmental Accounts) and have the objective to obtain common references to integrate economic and environmental information. The framework only encompasses emissions that can be traced to economic activities (Eurostat, 2000). In principle, there is no limit to which environmental statistics could be included. The only requirement is that data are compiled according to the classification and definitions of the national accounts. However, the environmental data that are currently more developed are the atmospheric emissions. Portugal participates in this initiative, having the National Statistics Institute (INE) developed NAMEA tables for 1993 and The economic data corresponds to the national inputoutput tables, in current prices, of 1993 and The environmental data includes emissions of SO 2, NOx, NMVOC, CH 4, CO, CO 2, N 2 O and NH 3 (INE, 1999). As it was stated before, the more recent publication of the input-output tables dates back to 1995 and consequently this year was taken as a reference for all the prospective calculations. The greenhouse gas emissions for the stated reference year are shown in the next table (Table 5). 57

67 Economic Sectors Greenhouse Gases SOx NOx COVNM CH 4 CO CO 2 N 2O NH 3 (ton) (ton) (ton) (ton) (ton) (Kton) (ton) (ton) 01 Agriculture and hunting Sylviculture and forestry Fishing Coal mining and manufacture of coal by-products Petroleum mining and refinery Electricity, gas and water Metallic mineral mining Non metallic minerals mining Manufacture of porcelain, faience, fine sandstone and pottery products 10 Manufacture of glass and glass articles Manufacture of other building materials Manufacture of chemical products Manufacture of metallic products Manufacture of non-electrical machinery Manufacture of machinery, apparatus, tools and other electrical material 16 Manufacture of transport vehicles and equipment Slaughter and meat processing Dairy products Conservation of fish and other related products Cooking oil and food fats Cereals and leguminous processing Other food processing Beverages industry Tobacco industry Textile and clothing industry Tanning and leather industries and imitated leather and hides products 27 Wood and cork industries Paper, graphics arts and publications industries Manufacture of rubber products and articles of plastic material 30 Other manufacturing industries Construction Restoring and repair Wholesale and retail trade Restaurants and hotels Land transport and inland waterways transport Maritime and air transport Transportation-related services Communications Financial services Insurance services House renting Services rendered for companies Commercial services of education and research Commercial services of health and veterinary Other commercial services Non-commercial services of Public Administration Non-commercial services of education and research

68 48 Non-commercial services of health and veterinary Other non-commercial services Private final consumption TOTAL Table 5 Portuguese greenhouse gas emissions by economic sector in Source: INE, In what concerns the Kyoto Protocol, the goals to be met are in terms of percentage of Global Warming Potential (GWP), not tons of emissions. The concept of a Global Warming Potential (GWP) has been developed to compare the ability of each greenhouse gas to trap heat in the atmosphere relative to another gas. Carbon dioxide was chosen as the reference gas to be consistent with IPCC guidelines. The GWP of a greenhouse gas is the ratio of global warming, or radiative forcing (both direct and indirect), from one unit mass of a greenhouse gas to that of one unit mass of carbon dioxide over a period of time. Whereas any time period can be selected, the 100-year GWPs is recommended by the IPCC and is employed by the United States for policy making and reporting purposes. The greenhouse gas estimations are usually presented in metric tons of carbon equivalent (MTCE). Since carbon corresponds to 12/44 ths of weight of CO 2, to convert the emissions of different greenhouse gases in tons of carbon equivalent (TCE), the following equation is used: MTCE = (Tons of 12 gas) (GWP) 44 ( 15) 7 Where GWP correspond to the Global Warming Potential, which assumes different values for each type of gas (Table 6). 7 Source: 59

69 Gas GWP CO 2 1 CH 4 21 N 2 O 310 HFC-23 11,700 HFC-125 2,800 HFC-134a 1,300 HFC-143a 3,800 HFC-152a 140 HFC-227ea 2,900 HFC-236fa 6,300 HFC-4310mee 1,300 CF 4 6,500 C 2 F 6 9,200 C 4 F 10 7,000 C 6 F 14 7,400 SF 6 23,900 Table 6 Global warming potential of different gases. Source: IPCC, NOTE: The methane GWP includes the direct effects and those indirect effects due to the production of tropospheric ozone and stratospheric water vapour. The indirect effect due to the production of CO 2 is not included. The GWP is only available in the literature for CO 2, CH 4 and N 2 O emissions since there is no agreed method to estimate the contribution of gases that indirectly affect radiative forcing to climate change, such as CO, NOx, NMVOCs and SO 2 (IPCC, 1996). Although it is not possible to include the contribution of these gases to the GWP, its emission s estimation for 2010 are included in this study. The greenhouse gas emissions for the reference years of 1990 and 1995 and the consequent GWP are depicted in the tables below. 60

70 Greenhouse Gases (tons) SOx NOx NMVOC CH CO CO N 2 O NH GWP Table 7 Greenhouse gases emissions in Portugal (1990 and 1995) and the consequent GWP. NOTE: The GWP is related with tons equivalents of CO 2. T CO2 = Tons of gas * GWP Sources: 1 Seixas, Institute of Meteorology in Portugal s Second Report, INE, 1995 The numbers showed the previous table indicate that in Portugal there was an increase of 27,8% in the GWP, between 1990 and 1995, caused by an increase of 1.34% in the CH 4 emissions, an increase of 39.43% in the CO 2 emissions and an increase of 8.95% in the N 2 O emissions Economic Development Scenarios for Portugal The main objective of this work is to provide a useful and reliable methodology that correlates environmental burdens with variations in economic activity, and to demonstrate its use with the case study of the estimation of greenhouse gas emissions in Portugal for

71 In this section, the Environmental Input-Output (EIO) methodology will be applied considering two different development scenarios for 2010, which are publicly available by official entities. The emissions forecast will be based on the Portuguese transactions table and greenhouse gas emissions of year 1995, since it is the most recent input-output table available in Portugal. It is important to stress that the estimation of GHGs emissions provided in this work is conservative, i.e. the EIO methodology does not take into account the expected technological change in the future, changes in development strategies and excludes the effect of future policy actions that can be adopted to reduce GHGs emissions and meet the commitments taken in Kyoto. In addition, the application of the EIO methodology requires economic sectorial prospective studies, which are not generally available in Portugal. The only economic forecast discriminated by some economic sectors found for 2010 was produced by the Portuguese Industry and Energy Ministering Office ( Direcção Geral de Energia - DGE) in the National Energy Plan ( Plano Energético Nacional PEN). For the remaining sectors it was considered an increase of 2% per year in the scenario A and of 1% per year in the scenario B, following the forecasts for the European average growth made by DGE. This forecast provides crucial data for policy making on the framework of the Kyoto Protocol in Portugal, since it indicates future levels of emissions discriminated by economic activity. This information is essential to promote the efficiency of environmental policies that may be focused on selected economic sectors in a way that their development will not be compromised. The Global Warming Potential is calculated on the basis of carbon dioxide, methane and nitrogen oxide pollutants. The factors used for converting CH 4 and N 2 O to GWP were 21 and 321 respectively. Following the Portuguese Energy Plan developed by DGE and a study concerning the strategy for the national energy sector (DGE, 1996), the economic growth projections for 2010, by economic sector, are the following (Table 8): 62

72 Sectors Scenario A (%) Scenario B (%) Electricity 3,0 2,5 3,0 2,3 Food Industry 3,0 3,0 2,0 1,9 Beverages industry 3,0 3,9 2,0 2,7 Tobacco industry -0,5-0,5-1,5-2,0 Textile & clothing industry 2,0 1,3 0,0 0,6 Tanning & leather industries 2,5 2,9 2,0 1,5 Wood industry 2,5 5,9 2,0 4,0 Cork industry 1,0 4,5 0,0 3,3 Wood furniture 4,0 6,0 2,0 5,7 Pulp and paper 5,0 5,0 2,5 5,2 Graphics arts & publications 5,0 5,0 3,5 3,6 Chemical industry (base) 3,0 4,0 2,5 2,9 Chemical industry (ligeira) 4,0 4,4 4,0 3,0 Ceramic industry 3,5 5,7 3,0 4,2 Glass and glass articles 5,0 5,3 4,0 4,8 Ciment 1,0 0,6 0,0-0,9 Ornamental rocks 10,0 6,7 8,0 6,7 Ferrous metalurgy 1,0 0,7 0,5 0,6 Non-ferrous metalurgy 7,0 7,9 4,0 7,6 Metallic products 1,5 2,7 1,0 1,7 Non-electrical machinery 10,0 7,9 7,0 7,5 Machinery, apparatus, etc. 8,0 6,7 8,0 5,0 Ship-building 1,0 2,0 0,0 0,8 Automobile 4,0 4,7 4,0 3,8 Source: DGE, 1988 and DGE, Table 8 Annual growing patterns by economic sector for Portugal. In the studies performed by DGE, two development scenarios were provided, one representing a more dynamic growth, scenario A, and other one considering a more conservative growth, scenario B. Both scenarios will be used in the application of the EIO methodology to Portugal Application of the Environmental Input-Output methodology to Portugal. Prospective GHGs emissions for In the economic projections considered for 2010 in the National Energetic Plan, the economic sectors do not exactly match the ones considered in the National Accounts (Table 9), therefore some aggregation and simplifications had to be made (Table 10). 63

73 National Energetic Plan Electricity Food Industry Beverages industry Tobacco industry Textile & clothing industry Tanning & leather industries Wood industry Cork industry Wood furniture Pulp and paper Graphics arts & publications Chemical industry (base) Chemical industry (ligeira) Ceramic industry Glass and glass articles Ciment Ornamental rocks Ferrous metalurgy Non-ferrous metalurgy Metallic products Non-electrical machinery Machinery, apparatus, etc. Ship-building Automobile National Accounts Electricity, gas and water Other food processing Beverages industry Tobacco industry Textile & clothing industry Tanning & leather industries Wood & cork industries Paper, graphics arts & publications Chemical products Ceramic industry Glass and glass articles Other building materials Metallic mineral mining Metallic products Non-electrical machinery Machinery, apparatus, etc. Transport vehicles and equipment Table 9 Economic sectors included in the National Energetic Plan (DGE) and in the National Accounts (INE). 64

74 Sectors Scenario (%) A B Electricity 48,4 45,5 Other food processing 55,8 33,3 Beverages industry 70,0 44,1 Tobacco industry -7,2-24,2 Textile & clothing industry 25,6 6,2 Tanning & leather industries 50,6 28,1 Wood & cork industries 93,9 64,7 Paper, graphics arts & publications 107,9 78,5 Chemical products 79,4 57,0 Ceramic industry 106,8 74,9 Glass and glass articles 113,9 94,4 Other building materials 109,8 86,2 Metallic mineral mining 106,4 81,0 Metallic products 106,4 81,0 Non-electrical machinery 244,5 189,1 Machinery, apparatus, etc. 181,0 139,3 Transport vehicles and equipment 60,4 42,5 Table 10 Total growth by economic sector for Portugal, according with National Accounts economic sectors division. Applying the EIO methodology (equation 13) to the development scenarios presented in the previous table and using the NAMEA emissions table for 1995 it is possible to calculate the variation in the GHGs emissions for 2010 as well as the total emissions expected. The calculations based on the EIO methodology for scenario A and B (presented in table 10) indicates a considerable increase in the greenhouse gas emissions in The results are represented in table 11 and 12. The total greenhouse gas emissions expected for 2010 are presented in table 13 and 14. The emissions related to the households or private consumption in the NAMEA table were distributed by the different economic sectors based on the relative contribution of the private consumption to each sector s final consumption. 65

75 Economic sectors GHGs Emissions (ton) (Scenario A) GWP SOx NOx NMVOC CH 4 CO CO 2 N 2 O NH 3 (ton eq CO 2 ) Agriculture & hunting 3128, ,5 9694, ,5 9550, ,0 9504, , ,0 Sylviculture & forestry 182,1 1609, ,9 12,4 559, ,0 35,2 1, ,0 Fishing 1314, ,5 175,0 706,9 1461, ,0 14,7 0, ,6 Coal mining 22,8 6,4 0,0 0,0 0,0 1824,0 0,0 0,0 1823,8 Petroleum Mining and Refinery 70867,9 9472, ,8 6256,4 1717, ,0 148,3 0, ,8 Electricity, gas and water , ,1 286,6 113,2 1667, ,0 157,1 0, ,0 Metallic mineral mining 6077,3 1372,9 705,4 65, , ,0 7,1 22, ,6 Non metallic minerals mining 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Porcelain, faience, etc. 5062,1 3058,2 5023,5 527,7 7581, ,0 83,0 0, ,8 Glass and glass articles 12258,7 2215,6 52,8 152,2 591, ,0 9,1 0, ,3 Other building materials 35692, ,0 6157,4 1310,4 7795, ,0 98,0 0, ,0 Chemical products 4187,3 3654,5 732,8 340, , ,0 3096,1 6608, ,5 Metallic products 248,2 280,3 1165,5 25,5 10, ,0 1,1 0, ,3 Non-electrical machinery 40,6 44,9 369,7 4,3 2,1 8548,0 0,0 0,0 8637,4 Machinery, apparatus, etc. 224,2 253,5 357,0 22,4 8, ,0 0,0 0, ,4 Transport vehicles and equipment 45,7 51,6 2046,8 4,6 2,0 9267,0 0,0 0,0 9364,6 Slaughter & meat processing 874,3 308,0 26,2 31,5 90, ,0 1,3 0, ,1 Dairy products 1398,9 493,6 41,6 49,6 144, ,0 2,7 0, ,5 Conservation of fish and other related products 651,8 229,8 142, ,5 67, ,0 326,5 0, ,5 Cooking oil and food fats 357,1 125,7 4078,8 13,4 37, ,0 0,0 0, ,8 Cereals & leguminous processing 644,1 228,0 2441,3 22,5 66, ,0 1,3 0, ,1 Other food processing 1955,2 690,3 177, ,8 202, ,0 319,5 0, ,6 Beverages industry 1253,1 442,2 3982,4 3036,2 129, ,0 93,0 0, ,0 Tobacco industry -67,3-31,0-0,7-2,7-0,8-5070,0-0,1 0,0-5148,8 Textile & clothing industry 2227,4 420,0 138,5 2858,1 74, ,0 87,7 0, ,8 Tanning & leather industries 505,0 124,9 3229,3 7,6 26, ,0 0,5 0, ,6 Wood & cork industries 491,6 68,0 6771,1 0,0 5, ,0 0,0 0, ,7 Paper, graphics arts & publications 35367,7 9846,4 7485, ,6 3277, ,0 545,0 0, ,0 Rubber products & articles of plastic material 4663,7 738, ,9 67,3 27, ,0 2,0 0, ,7 Other manufacturing industries 364,5 135,7 72,9 5119,9 26, ,0 154,6 0, ,2 Construction 2964,4 4736, ,1 911,0 3318, ,0 39,7 0, ,8 Restoring & repair 409,3 654,9 1882,8 125,7 458, ,0 5,8 0, ,1 Wholesale & retail trade 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Restaurants & hotels 334,4 532,9 313,9 102,5 374, ,0 5,1 0, ,2 Land transport & inland waterways transport 12484, , ,0 849, , ,0 444,2 36, ,0 Maritime & air transport 14587, , ,4 3095, , ,0 107,3 0, ,3 Transportation-related services 333,5 531,3 312,2 102,8 372, ,0 3,9 0, ,5 Communications 64,9 103,2 60,6 20,2 72, ,0 1,1 0, ,1 Financial services 0,8 1,2 0,6 0,2 0,8 385,0 0,0 0,0 389,1 Insurance services 29,6 47,1 26,9 9,4 32, ,0 0,0 0, ,0 House renting 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Services rendered for companies 212,9 340,8 200,2 65,9 238, ,0 2,5 0, ,5 Commercial services of education & research 54,0 86,9 51,4 17,1 60, ,0 1,3 0, ,0 Commercial services of health& veterinary 36,2 59,0 34,9 10,7 41, ,0 0,0 0, ,6 Other commercial services 271,7 433,3 3682, ,8 303, ,0 860,1 7197, ,1 Non-commercial services of Public Administration 892,3 1425,3 9896, ,9 1776, ,0 12,1 7637, ,0 Non-commercial services of education & research 111,7 179,0 105,0 35,0 125, ,0 1,3 0, ,0 Non-commercial services of health & veterinary 51,1 91,5 32,3 9,4 61, ,0 0,0 0, ,5 Other non-commercial services 88,8 141,3 83,4 26,9 98, ,0 1,3 0, ,5 Private comsumption 918, , ,7 4089, , ,0 407,3 259, ,0 TOTAL , , , , , , , , ,7 Table 11 Increase in greenhouse gas emissions forecasted for 2010, according with scenario A. 66

76 Economic sectors GHGs Emissions (ton) (Scenario B) GWP SOx NOx NMVOC CH 4 CO CO 2 N 2 O NH 3 (ton eq CO 2 ) Agriculture & hunting 2614, ,9 8102, ,2 7982, ,0 7944, , ,0 Sylviculture & forestry 136,2 1203, ,8 9,3 418, ,0 26,3 0, ,4 Fishing 1125,6 9915,0 149,8 605,1 1251, ,0 12,6 0, ,1 Coal mining 18,8 5,3 0,0 0,0 0,0 1502,0 0,0 0,0 1502,1 Petroleum Mining and Refinery 50065,6 6692, ,7 4419,9 1213, ,0 104,8 0, ,0 Electricity, gas and water , ,2 232,7 91,9 1353, ,0 127,5 0, ,0 Metallic mineral mining 4795,2 1083,2 556,6 51, , ,0 5,6 17, ,0 Non metallic minerals mining 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Porcelain, faience, etc. 3784,8 2286,5 3755,9 394,5 5668, ,0 62,1 0, ,5 Glass and glass articles 10038,6 1814,3 43,2 124,6 484, ,0 7,5 0, ,1 Other building materials 30508, ,3 5263,0 1120,1 6663, ,0 83,8 0, ,0 Chemical products 3214,5 2805,5 562,6 261, , ,0 2376,9 5073, ,3 Metallic products 192,5 217,4 904,0 19,8 7, ,0 0,9 0, ,8 Non-electrical machinery 31,4 34,7 285,5 3,3 1,7 6602,0 0,0 0,0 6671,6 Machinery, apparatus, etc. 172,6 195,2 274,9 17,3 6, ,0 0,0 0, ,5 Transport vehicles and equipment 32,3 36,5 1446,1 3,3 1,4 6548,0 0,0 0,0 6616,4 Slaughter & meat processing 746,8 263,1 22,4 26,9 77, ,0 1,1 0, ,1 Dairy products 1202,2 424,2 35,7 42,6 124, ,0 2,3 0, ,2 Conservation of fish and other related products 561,2 197,9 122,6 9253,1 57, ,0 281,2 0, ,3 Cooking oil and food fats 307,0 108,1 3506,4 11,5 32, ,0 0,0 0, ,1 Cereals & leguminous processing 551,5 195,2 2090,4 19,3 56, ,0 1,1 0, ,3 Other food processing 1470,0 519,0 133,5 7887,5 152, ,0 240,2 0, ,1 Beverages industry 876,2 309,2 2784,5 2123,0 90, ,0 65,0 0, ,7 Tobacco industry -225,2-103,7-2,2-9,0-2, ,0-0,2 0, ,2 Textile & clothing industry 788,2 148,6 49,0 1011,3 26, ,0 31,0 0, ,4 Tanning & leather industries 282,9 69,9 1809,0 4,3 14, ,0 0,3 0, ,7 Wood & cork industries 360,9 49,9 4970,9 0,0 4, ,0 0,0 0, ,0 Paper, graphics arts & publications 25105,9 6989,5 5313, ,4 2326, ,0 386,8 0, ,3 Rubber products & articles of plastic material 3853,2 610, ,1 55,6 22, ,0 1,7 0, ,1 Other manufacturing industries 307,1 114,4 61,4 4314,4 22, ,0 130,3 0, ,8 Construction 2547,3 4069, ,5 782,8 2851, ,0 34,1 0, ,9 Restoring & repair 343,6 549,8 1580,7 105,5 385, ,0 4,8 0, ,3 Wholesale & retail trade 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Restaurants & hotels 270,9 431,8 254,3 83,0 303, ,0 4,2 0, ,1 Land transport & inland waterways transport 9886, , ,4 672, , ,0 351,8 29, ,5 Maritime & air transport 1538,6 3658,8 1832,9 326,5 2625, ,0 11,3 0, ,4 Transportation-related services 120,2 191,5 112,5 37,0 134, ,0 1,4 0, ,0 Communications 50,0 79,5 46,7 15,6 55, ,0 0,8 0, ,6 Financial services 0,6 1,0 0,5 0,2 0,6 324,0 0,0 0,0 327,1 Insurance services 19,1 30,4 17,4 6,1 20,8 8687,0 0,0 0,0 8814,3 House renting 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Services rendered for companies 140,1 224,4 131,8 43,4 156, ,0 1,7 0, ,8 Commercial services of education & research 46,5 74,9 44,3 14,8 52, ,0 1,1 0, ,2 Commercial services of health& veterinary 31,2 50,9 30,1 9,3 35, ,0 0,0 0, ,3 Other commercial services 221,4 353,1 3000, ,2 247, ,0 700,8 5864, ,4 Non-commercial services of Public Administration 769,7 1229,5 8536, ,9 1532, ,0 10,4 6588, ,0 Non-commercial services of education & research 96,4 154,4 90,6 30,2 108, ,0 1,2 0, ,6 Non-commercial services of health & veterinary 44,1 78,9 27,9 8,1 53, ,0 0,0 0, ,3 Other non-commercial services 76,6 121,9 72,0 23,2 84, ,0 1,2 0, ,6 Private comsumption 690, , ,3 3076, , ,0 306,4 195, ,5 TOTAL , , , , , , , , ,5 Table 12 Increase in greenhouse gas emissions forecasted for 2010, according with scenario B. 67

77 Economic sectors GHGs Emissions (ton) (Scenario A) GWP SOx NOx NMVOC CH 4 CO CO 2 N 2 O NH 3 (ton eq CO 2 ) Agriculture & hunting 5723, , , , , , , , ,9 Sylviculture & forestry 358,1 3164, ,9 24,4 1100, ,0 69,2 2, ,1 Fishing 2298, ,5 306,0 1235,9 2555, ,0 25,7 0, ,0 Coal mining 47,8 13,4 0,0 0,0 0,0 3824,0 0,0 0,0 3824,0 Petroleum Mining and Refinery , , , ,4 3014, ,0 260,3 0, ,6 Electricity, gas and water , ,1 671,6 265,2 3907, ,0 368,1 0, ,4 Metallic mineral mining 11212,3 2532,9 1301,4 120, , ,0 13,1 41, ,3 Non metallic minerals mining 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Porcelain, faience, etc. 9513,1 5747,2 9440,5 991, , ,0 156,0 0, ,0 Glass and glass articles 24342,7 4399,6 104,8 302,2 1174, ,0 18,1 0, ,8 Other building materials 63012, , ,4 2313, , ,0 173,0 0, ,9 Chemical products 8604,3 7509,5 1505,8 699, , ,0 6362, , ,6 Metallic products 472,2 533,3 2217,5 48,5 19, ,0 2,1 0, ,6 Non-electrical machinery 59,6 65,9 542,7 6,3 3, ,0 0,0 0, ,8 Machinery, apparatus, etc. 354,2 400,5 564,0 35,4 13, ,0 0,0 0, ,8 Transport vehicles and equipment 114,7 129,6 5138,8 11,6 5, ,0 0,0 0, ,3 Slaughter & meat processing 1541,3 543,0 46,2 55,5 159, ,0 2,3 0, ,0 Dairy products 2441,9 861,6 72,6 86,6 252, ,0 4,7 0, ,5 Conservation of fish and other related products 1136,8 400,8 248, ,5 117, ,0 569,5 0, ,7 Cooking oil and food fats 624,1 219,7 7128,8 23,4 65, ,0 0,0 0, ,8 Cereals & leguminous processing 1130,1 400,0 4283,3 39,5 116, ,0 2,3 0, ,9 Other food processing 4201,2 1483,3 381, ,8 435, ,0 686,5 0, ,4 Beverages industry 2735,1 965,2 8692,4 6627,2 282, ,0 203,0 0, ,3 Tobacco industry 861,7 397,0 8,3 34,3 10, ,0 0,9 0, ,4 Textile & clothing industry 9545,4 1800,0 593, ,1 317, ,0 375,7 0, ,6 Tanning & leather industries 1496,0 369,9 9566,3 22,6 78, ,0 1,5 0, ,6 Wood & cork industries 990,6 137, ,1 0,0 11, ,0 0,0 0, ,0 Paper, graphics arts & publications 70543, , , ,6 6537, ,0 1087,0 0, ,1 Rubber products & articles of plastic material 9303,7 1473, ,9 134,3 54, ,0 4,0 0, ,3 Other manufacturing industries 654,5 243,7 130,9 9193,9 47, ,0 277,6 0, ,6 Construction 5206,4 8318, ,1 1600,0 5828, ,0 69,7 0, ,1 Restoring & repair 764,3 1222,9 3515,8 234,7 856, ,0 10,8 0, ,3 Wholesale & retail trade 2177,0 3479,0 7464,0 669,0 2437, ,0 0,0 0, ,0 Restaurants & hotels 595,4 948,9 558,9 182,5 666, ,0 9,1 0, ,7 Land transport & inland waterways transport 24034, , ,0 1635, , ,0 855,2 70, ,7 Maritime & air transport 16354, , ,4 3470, , ,0 120,3 0, ,4 Transportation-related services 505,5 805,3 473,2 155,8 564, ,0 5,9 0, ,4 Communications 125,9 200,2 117,6 39,2 140, ,0 2,1 0, ,3 Financial services 4,8 7,2 3,6 1,2 4,8 2385,0 0,0 0,0 2410,1 Insurance services 51,6 82,1 46,9 16,4 56, ,0 0,0 0, ,9 House renting 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Services rendered for companies 380,9 609,8 358,2 117,9 426, ,0 4,5 0, ,2 Commercial services of education & research 95,0 152,9 90,4 30,1 106, ,0 2,3 0, ,8 Commercial services of health& veterinary 63,2 103,0 60,9 18,7 72, ,0 0,0 0, ,4 Other commercial services 476,7 760,3 6461, ,8 532, ,0 1509, , ,5 Non-commercial services of Public Administration 1555,3 2484, , ,9 3096, ,0 21, , ,7 Non-commercial services of education & research 194,7 312,0 183,0 61,0 218, ,0 2,3 0, ,1 Non-commercial services of health & veterinary 89,1 159,5 56,3 16,4 107, ,0 0,0 0, ,8 Other non-commercial services 154,8 246,3 145,4 46,9 171, ,0 0,0 0, ,3 Private comsumption 2566, , , , , ,0 1138,3 725, ,5 TOTAL , , , , , , , , ,5 Table 13 Total greenhouse gas emissions forecasted for 2010 in Portugal, according with scenario A. 68

78 Economic sectors GHGs Emissions (ton) (Scenario B) GWP SOx NOx NMVOC CH 4 CO CO 2 N 2 O NH 3 (ton eq CO 2 ) Agriculture & hunting 5209, , , , , , , , ,4 Sylviculture & forestry 312,2 2758, ,8 21,3 959, ,0 60,3 1, ,2 Fishing 2109, ,0 280,8 1134,1 2345, ,0 23,6 0, ,6 Coal mining 43,8 12,3 0,0 0,0 0,0 3502,0 0,0 0,0 3502,0 Petroleum Mining and Refinery , , ,7 9144,9 2510, ,0 216,8 0, ,3 Electricity, gas and water , ,2 617,7 243,9 3593, ,0 338,5 0, ,6 Metallic mineral mining 9930,2 2243,2 1152,6 106, , ,0 11,6 36, ,5 Non metallic minerals mining 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Porcelain, faience, etc. 8235,8 4975,5 8172,9 858, , ,0 135,1 0, ,1 Glass and glass articles 22122,6 3998,3 95,2 274,6 1067, ,0 16,5 0, ,7 Other building materials 57828, ,3 9976,0 2123, , ,0 158,8 0, ,6 Chemical products 7631,5 6660,5 1335,6 620, , ,0 5642, , ,1 Metallic products 416,5 470,4 1956,0 42,8 16, ,0 1,9 0, ,4 Non-electrical machinery 50,4 55,7 458,5 5,3 2, ,0 0,0 0, ,3 Machinery, apparatus, etc. 302,6 342,2 481,9 30,3 11, ,0 0,0 0, ,5 Transport vehicles and equipment 101,3 114,5 4538,1 10,3 4, ,0 0,0 0, ,8 Slaughter & meat processing 1413,8 498,1 42,4 50,9 146, ,0 2,1 0, ,5 Dairy products 2245,2 792,2 66,7 79,6 232, ,0 4,3 0, ,2 Conservation of fish and other related products 1046,2 368,9 228, ,1 107, ,0 524,2 0, ,0 Cooking oil and food fats 574,0 202,1 6556,4 21,5 60, ,0 0,0 0, ,4 Cereals & leguminous processing 1037,5 367,2 3932,4 36,3 106, ,0 2,1 0, ,0 Other food processing 3716,0 1312,0 337, ,5 385, ,0 607,2 0, ,7 Beverages industry 2358,2 832,2 7494,5 5714,0 243, ,0 175,0 0, ,7 Tobacco industry 703,8 324,3 6,8 28,0 8, ,0 0,8 0, ,6 Textile & clothing industry 8106,2 1528,6 504, ,3 269, ,0 319,0 0, ,2 Tanning & leather industries 1273,9 314,9 8146,0 19,3 66, ,0 1,3 0, ,3 Wood & cork industries 859,9 118, ,9 0,0 10, ,0 0,0 0, ,0 Paper, graphics arts & publications 60281, , , ,4 5586, ,0 928,8 0, ,7 Rubber products & articles of plastic material 8493,2 1345, ,1 122,6 49, ,0 3,7 0, ,3 Other manufacturing industries 597,1 222,4 119,4 8388,4 43, ,0 253,3 0, ,1 Construction 4789,3 7651, ,5 1471,8 5361, ,0 64,1 0, ,3 Restoring & repair 698,6 1117,8 3213,7 214,5 783, ,0 9,8 0, ,1 Wholesale & retail trade 2177,0 3479,0 7464,0 669,0 2437, ,0 0,0 0, ,0 Restaurants & hotels 531,9 847,8 499,3 163,0 595, ,0 8,2 0, ,8 Land transport & inland waterways transport 21436, , ,4 1458, , ,0 762,8 63, ,5 Maritime & air transport 3305,6 7860,8 3937,9 701,5 5640, ,0 24,3 0, ,9 Transportation-related services 292,2 465,5 273,5 90,0 326, ,0 3,4 0, ,2 Communications 111,0 176,5 103,7 34,6 123, ,0 1,8 0, ,7 Financial services 4,6 7,0 3,5 1,2 4,6 2324,0 0,0 0,0 2348,4 Insurance services 41,1 65,4 37,4 13,1 44, ,0 0,0 0, ,7 House renting 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Services rendered for companies 308,1 493,4 289,8 95,4 344, ,0 3,7 0, ,9 Commercial services of education & research 87,5 140,9 83,3 27,8 98, ,0 2,1 0, ,7 Commercial services of health& veterinary 58,2 94,9 56,1 17,3 66, ,0 0,0 0, ,3 Other commercial services 426,4 680,1 5779, ,2 476, ,0 1349, , ,1 Non-commercial services of Public Administration 1432,7 2288, , ,9 2852, ,0 19, , ,6 Non-commercial services of education & research 179,4 287,4 168,6 56,2 201, ,0 2,2 0, ,8 Non-commercial services of health & veterinary 82,1 146,9 51,9 15,1 99, ,0 0,0 0, ,7 Other non-commercial services 142,6 226,9 134,0 43,2 157, ,0 2,2 0, ,5 Private comsumption 2338, , , , , ,0 1037,4 661, ,7 TOTAL , , , , , , , , ,5 Table 14 Total greenhouse gas emissions forecasted for 2010 in Portugal, according with scenario B. 69

79 Tables 13 and 14 indicate that the Global Warming Potential (GWP) estimated for 2010 is 174 Mt of CO 2 eq., according with the more dynamic growth scenario (scenario A) and Mt of CO 2 eq., according with a more conservative growth scenario (scenario B). Although these results can only be considered as indicative ones since they depend on the economic growth considered, these estimations suggest an increase of around 103% in the GWP when compared with 1995 s levels and 159% when compared with 1990 s levels, according with scenario A and around 80% of increase when compared with 1995 s levels and 129% when compared with 1990 s levels, according with scenario B. These GWP estimations are considerably higher than the ones agreed in the Kyoto Protocol. In fact, the maximum increase in the GWP for Portugal, in , established in the Kyoto Protocol is 27%. The projections also indicate that the objectives relatively to CO 2, N 2 O and CH 4 will not be accomplished in this situation. In fact, according to these projections, CO 2 emissions in 2010 will increase around 173% (scenario A) and 139% (scenario B) when compared to 1990 levels, against the 40% increase established in the Kyoto Protocol. The N 2 O emissions will increase 127.4% (scenario A) and 104% (scenario B) when compared to 1990 levels in opposition to the 4% limit established in Kyoto. Finally, CH 4 emissions will increase 131% (scenario A) and 111% (scenario B), compared with the target of 3% agreed in Kyoto (Table 15). It is important to notice that this projection did not consider the introduction of natural gas. The use of natural gas will make possible, in the coming years, to decrease the GHGs emissions due to energy consumption. This analysis clearly suggests that if Portugal wishes to accomplish the national targets defined in the Kyoto Protocol radical and effective policies have to be adopted, otherwise Portugal will be far behind its goals. Greenhouse Gas % GWP (1990/2010) (scenario A) % GWP (1990/2010) (scenario B) % GWP (1990/ ) (Kyoto) CO % + 139% + 40% N 2 O + 127% + 104% + 4% CH % + 111% - 3% % GWP + 159% + 129% + 27% Table 15 Comparison between the GWP increase estimated for 2010 and the levels agreed in Kyoto. 70

80 Consequently, based on scenarios A and B a reduction in the greenhouse gas emissions of about 106 Mt CO 2 eq. (scenario A) and 87 Mt CO 2 eq. (scenario B) is required in order to meet Kyoto objectives. In this context, it is important to identify the economic sectors that have the major contributions for the total GWP. Figure 24 provides the sectors whose contribution is more relevant, namely the Agriculture (around 10% of GWP), the Energy sectors (around 20% of GWP), the Other Building Materials (around 9% of GWP), the Paper (around 6% of GWP), the Transportation (around 8% of GWP), the Non-commercial Services of Public Administration (around 18% of GWP) sectors and the households consumption (around 12% of GWP). Agriculture & hunting 10,3 10,6 Petroleum M ining and R efinery 3,4 3,2 Electricity,gas and w ater 16,2 16,8 O ther building materials 8,7 9,0 Paper,graphics arts & publications 6,2 6,0 Land transport & inland w aterw ays transport 7,4 7,4 Maritime & air transport 0,5 2,4 N on-com m ercialservices of Public Administration 17,5 18,1 Private consum ption 12,3 12,6 A B Figure 24 Economic sectors that contribute the most for National Global Warming Potential, according with scenario A and B. Values in percentage of the total GWP. The high contribution of the Agriculture and Hunting sector for National GWP (10%) may be due to the high inputs coming from the Petroleum and Chemical sectors and also because this sector has the highest CH 4 and N 2 O emissions, which contribute deeply for the Global Warming Potential. The energy sectors are the major contributors for the Global Warming Potential (around 20%). This was an expected result since the economic production is strongly based upon energy consumption and the electricity production process releases high levels of CO 2. 71

81 The Other Building Materials sector contributes around 9% to GWP mainly because it has the second highest emissions of CO 2 due to its dependency on energy consumption, and moreover, the cement production contributes significantly to GHG emissions. Concerning the Paper sector, it produces high-level emissions of CH 4 and CO 2 and therefore it is estimated that it will contribute nearly 6% for National GWP in Moreover, this sector depends considerably on the Energy and Chemical sectors, which produces considerable amounts of GHGs, especially the Energy sector. The Transportation sectors contribute considerably to GHGs and thus for GWP, since they are energy intensive. In fact, it is estimated that nearly one third of the energy consumed in the United States is applied in Transportation (Pennsylvania Statewide Long Range Transportation Plan). In Portugal between 1991 and 1997 the energy consumption in the transportation sector ranged from 30.4% and 32.7% of the final energy consumption, in petroleum equivalent tons (DGTT, 1999). The European Environment Agency states that by 2010, transport is expected to be the largest single contributor to EU greenhouse gas emissions, which may jeopardise the EU s achievement of its target of an 8% reduction in GHGs emissions in under the Kyoto Protocol. The contribution of transports for GHGs emissions is more relevant than it may seem, because the major contribution for emissions comes from the private transportation and not from the sector itself. According to Seixas, in global terms the importance of the private transport is extremely relevant, being responsible by 24% of the National emissions of CO 2 (Seixas, 2000). The private transportation is increasing in Portugal, thus raising even more their responsibility in the national GHGs emissions. In reality, in 1990 there were nearly 250 vehicles per 1000 inhabitants, which were considered a low number compared with the European Union average. However, this number is expected to increase, reaching 455 vehicles per 1000 inhabitants, by 2010 (DGE, 1999) 8, i.e. surpassing the current ratio of the European Union (Eurostat, 1999) 8. Since the Energy and Transportation sectors are responsible for one the largest shares of GHGs emissions it seems that the policy intervention on these sectors will have a relevant impact on the overall results. A variety of options are available for reducing greenhouse gas emissions, ranging from the development of new and more efficient technologies, namely concerning energy consumption, to the use of fair fiscal instruments or strong impositions on the limits of emissions. As mentioned above, it seems that the main intervention should be focused on the 8 In (Seixas, 2000) 72

82 Energy and the Transportation sectors, although a wide range of other interventions can be also considered and studied. With no intention of being exhaustive, the next section discusses, in a general way, some actions to reduce or mitigate the future greenhouse gas emissions in Portugal. 73

83 5 DISCUSSION AND MAIN CONCLUSIONS 5.1 Discussion Compliance Mechanisms Public policies are generally made as a result of complex political processes and most decisions are usually highly unstructured and often depend on the personal judgement of some not always identifiable decision-making experts. Although policy evaluations frequently called for multi disciplinary team efforts for inputs, many planning and controlling aspects are viewed differently by different managers with different levels of responsibilities and perceptions. This is the reason why it is important to use a common methodology to evaluate greenhouse gas emissions, enabling their standard comparison over the years. Solutions to environmental problems require innovative methods of approach, as well as the co-operation and participation of all sectors of society for their implementation. This might include regulation (through legal and economic instruments), control and management, international co-operation and agreements, and monitoring and assessment (Asante-Duah, 1998). However, the introduction of environmental legislation will always be followed by a lag before the effects of the legislation become apparent, because of the need for capital restructuring. In addition, legislation will never be effective without strong commitment and efficient fiscal mechanisms. Thus, some other kind of solution should also be considered. According with David Victor (1999), if policymakers focus on setting prices or quantities of emissions, they must overcome a huge barrier -- enforcement. The concept of emission trading, included in the Kyoto Protocol, will be in his opinion, difficult to implement because it requires the impossible task of distributing permits worth trillions of dollars. That leaves other alternatives, such as co-ordination of carbon taxes or other national policies, which are not easily enforced. Policymakers could, for instance, focus commitments on "liberal states" in which internal public pressure, for example, from environmental groups, and robust legal systems make it possible to enforce international commitments from inside (ground-up) rather than the outside (top-down). But international co-operation on prices and quantities that is restricted to such nations is unlikely to slow global warming by much, because those states account for a declining fraction of the emissions that cause global warming. Governments are under pressure from their own populations to address international environmental problems. According with David Victor (1999), this internal pressure to 74

84 comply is strongest in industrialised democracies, or "liberal" states, where, typically, three factors are present. One is that they are wealthy and have tackled more pressing environmental problems, such as providing clean, piped water and basic sanitation. They perceive that they can afford to spend resources on the environment and can worry about uncertain distant risks that are characteristic of the issues on the international environmental agenda. Second, these societies are also typically open and democratic. Freedom of association makes it possible for non-governmental organisations (NGOs) to translate new ideas into political action. Conversely, in closed and undemocratic societies, new ideas yield action only at the pace by which insulated elites discover and embrace new ideas. Openness spreads and refines new ideas across political borders. The result is a synchronicity in the international environmental agenda among liberal states as ideas diffuse rapidly through networks of individuals and NGOs. The combination of openness and democratic policies eases the transmission of these ideas into the political decision-making process. Liberal states, having similar values, are loosely synchronised in their willingness to tackle new environmental concerns as they arise. Third, liberal societies have independent judiciaries and other institutions for checking the actions of government. Successful campaigns to put environmental ideas into action often result in legislative decisions that can be judicially enforced if politicians and administrators fail to live up to legislative mandates. And when judicial strategies fail, other methods -- media campaigns, lobbying, and boycotts -- are available to encourage compliance. Nevertheless, tackling many problems, especially global ones, requires actions by countries that are neither liberal nor wealthy. Since deep cuts in emissions will be needed to slow global warming, an agreement that is restricted to the OECD nations would not have the expected results. Abatement by the OECD countries alone will not reduce emission levels over the next century sufficiently to affect global warming significantly. However, to date the developing countries have not shown much enthusiasm for abatement because they perceive it as being inimical to their development aspirations. To bring them into a global agreement, therefore, seems likely to require significant financial and/or technological transfers (Goldin and Winters, 1995). In some cases developing nations have adopted and implemented stringent commitments, even if without the internal pressure that liberal, advanced countries face, only because they can usufruct from compensation mechanisms. A compensation mechanism could entice others to participate, but significant cuts in emissions will be costly unless the advanced industrialised countries are convinced that the costs of climate change will be severe and unavoidable, it is unlikely that they would be willing to pay for a scheme to compensate the full incremental cost. 75

85 The Kyoto Protocol allows the trading emissions between industrialised countries. Indeed, there is a newly market for tradable greenhouse gas emissions allowances established by the Kyoto Protocol. Contradicting David Victor s opinion, Petsonk (1999) considers that trading systems have demonstrated their ability to achieve environmental improvements faster and at lower cost than other regulatory alternatives, showing that nations, companies, and communities, given the opportunity, may preferentially seek to integrate emissions trading systems into the global economic marketplace. The idea of an emission trading system is to allocate property rights in the form of emission allowances, track their origin, and make buyers of these permits liable for non-compliance. Thus, the market will price the risk of non-compliance and sellers will have an incentive to stay in line. In designing the rules for the Kyoto Protocol's multilateral emissions trading system and structuring national implementation of Protocol obligations, governments can maximise environmental and economic benefits if they refrain from raising non-tariff barriers to trade in emission allowances, and avoid imposing quantitative restrictions on, or arbitrarily discriminating against, such trade. By following these recommendations, governments enhance the potential for the Kyoto Protocol to achieve real, significant, and cost-effective reductions in emissions of global warming gases, while reducing the likelihood that their implementation of greenhouse gas emissions reduction measures would raise any inconsistency with their responsibilities under the multilateral trading system. Experience with market-based approaches to environmental protection at local, regional, and national levels has demonstrated that such programs, if properly designed, can achieve improved environmental results faster, and at less cost, than "command-and-control" approaches, technology mandates, operational performance standards, or taxes (Petsonk, 1999). However, this approach might be unrealistic to implement in a large scale since the inclusion of the developing countries will lead to the reallocation of the trading permits, making difficult for the industrialised countries to accept fewer permits than those they already have. Another difficulty is that forcing a modern economy to meet strict emissions limits on a timetable that is more rapid than the turnover of the capital stock, can require premature retirement of some stock (e.g. power plants), making it very costly considering its small impact on the long-term problem of carbon accumulation. In these situations a price instrument, such as the carbon tax might be better than restricting quantities, such as emissions trading or emissions targets. Nevertheless, the market in a carbon tax system does not automatically price the risk of non-compliance and thus the need for strong international 76

86 institutions is perhaps even greater than in a system of emission trading supported by buyer liability. Additionally, an OECD carbon tax coupled with revenue transfer to developing countries is unlikely to induce sufficient technical change to achieve emissions stability. Even if all transfers were devoted to efficiency-improving investment, only a relatively small proportion of developing countries capital stocks would be updated and even these benefits would be partly offset by the positive income effect of transfers on energy use (Goldin and Winters, 1995). Another possible solution to get an international response to global warming might be to focus on technology-related policies as a core element of environmental protection, since all the major centers of innovation in energy technologies are in the industrialised world and nearly all spending on basic research and development is from the industrialised nations. Moreover, the nations that have the greatest concern about the global warming, and thus the highest willingness to pay for action, are those where the technical solutions are most likely to emerge. A regime that co-ordinates effort to promote development and deployment of new energy technologies could focus on these liberal nations and the resulting new technologies could spread world-wide from this innovative core through the normal operation of private markets. Some rules on quantities and prices would also be needed to promote diffusion, but they would be complements rather than central elements of international collective action on global warming and less needy of strong enforcement. In this context, there should be incentives for energy-related basic research, for lowering the market barriers for new efficient products, and programs to aid pre-commercial investment in innovative technologies. Without government intervention, society would under-invest in basic research and other activities that create public goods, such as knowledge, and with deregulation of energy markets, basic energy-related research will decline. In this sense, governmental action is needed to halt this under-investment. These cleaner technologies promise significant tradeoffs in terms of improved product quality, enhanced production capacity, better process controllability, and increased product reliability. Unfortunately, some industries still don t appreciate the fact that substantial environmental and economic benefits could be realised in the long term (Asante-Duah, 1998). A technology strategy, like any other public policy, will require a concerted political effort to take implementation seriously, and in order to do so, it is crucial to have a reliable emissions inventory. Technology per si, doesn t make economic or political sense and a tax on emissions of greenhouse gases would also be necessary to provide an additional incentive for the application of new technologies in the filed. In fact, a concerted effort in the developing 77

87 nations, to support development and demonstration of new technologies, would make it possible for those technologies to diffuse world-wide through the normal operation of technology markets that are increasingly global and free from barriers. However, over time, additional incentives, such as a tax to limit greenhouse gas emissions, would be needed to ensure that a growing fraction of the world market faces the appropriate incentive and therefore applies new technologies in the field. Nevertheless, strategies to counter global warming based on technological innovation will likely have three advantages compared with conventional approaches: 1. There is a good theoretical basis to begin a technology-oriented approach in the liberal and industrialised nations, since they are the centers of innovation and perform high investments in R&D; 2. Technological innovation will lower the cost of abatement and therefore reduce the amount of the tax that eventually will be needed to encourage the application of these new technologies elsewhere; 3. In order for a technology-oriented strategy to be effective over the long run, it will require that all countries undertake market reforms, such as lowering market barriers and ensuring protection of intellectual property to make it easier for these technologies to enter the market. To conclude, although scores of agreements are in force and some compliance mechanisms are foreseen, few of the issues on the environment agenda seem to be solved. In fact, solving the main issues on the international environmental agenda would require deep co-operation, with attendant incentives for defection and the need for monitoring and enforcement. In practise, international environmental co-operation has rarely attempted real collaboration, where commitments are demanding and defections are common, unless they face strong penalties (enforcement) or inducements (compensation) to implement costly measures and sustain the collective effort Transportation sector Due to the high consumption of energy in the transports, some policy actions and solutions should be focused on this particular economic sector. In fact, the energy consumption in the transportation sector has been increasing over the last years. 78

88 % Industry Households Other Transportation Services Figure 25 Energy consumption in Portugal by economic sector Source: Energy Information (DGE, 1996) in DGTT, The European Commission is concerned about the dependence of economic growth on increases in transport activity and consequently on energy consumption 9. Main transportation modes are highly reliant on non-renewable fossil fuels use and consequently are major contributors to greenhouse gas emissions, particularly CO 2. In fact, the methodology applied in this thesis demonstrated that in Portugal the situation is basically the same - the transportation sector contributes significantly for GHGs emissions. The increasing use of heavier and more powerful vehicles, together with decreasing occupancy rates and load factors, has outweighed increases in vehicle energy efficiency due to technological advances (EEA, 2000). One strategy to efficiently use energy in the transportation sector will have to focus on the development and incentives to the commercialisation of more efficient vehicles and in the use of alternative energies (electrical, natural gas, GPL, ethanol or bio diesel vehicles). According to Seixas (2000), one possible solution to reduce the transport-related emissions, particularly CO 2, is to use organic carbon combustibles or a mixture. Two possible solutions are the ethanol providing from the biomass, such as vegetal matter; and the bio diesel, produced from several sources of natural oils. 9 European Commission Policy statement on Common Transport Policy for , in Environmental signals

89 Assuming the introduction in Portugal of 20% of ethanol in gasoline and 15% of bio diesel in the diesel beyond 2005, the CO 2 emissions in 2010 might decrease around 3709 ktons, meaning less 16% of the estimated value in the actual conditions (DGTT, 1999). However, the currently available technology in the market offers low performance and consequently the use of these combustibles will not be realist unless a new technology is developed until On the other hand, the introduction of bio diesel could represent an increase of fuel costs for the final consumer, since the price of bio diesel is higher than the diesel price, which requires some enforcement actions (Seixas, 2000). Over the past years in Portugal, there has been an increase in the share of emissions coming from the road transportation in comparison with the overall emissions. In what concerns CO 2, in 1990 it used to represent 14.9% of the overall emissions reaching 26.5% in The road transportation shows the highest levels of GHGs emissions. In global terms the contribution of the private transportation is very significant, being responsible by 24% of the national CO 2 emissions. The railway transportation is, after the maritime transportation, the most environmental friendly mode of transportation. Actually, the scenario in which 20% of the private transportation would be made by train would represent a 9% reduction in the CO 2 emissions in the Lisbon area and 1.2% at the national level (DGTT, 1999). In 1998, the biggest percentage of trips was made by private transportation (57%) leading to situations of traffic congestion, with negative costs due to time loss, increase in the fuel consumption, increase of the noise and atmospheric pollution, increase of the number of accidents and problems coming from psychological stress. In fact there has been an increase in the road private transportation despite the expansion of the subway network and the introduction of the railway in the 25 de Abril bridge. Therefore, an important measure is to promote the use of other modes of transportation that can be an alternative to the road transportation. This is valid either for transportation of goods or to private transportation. One possible option is to attribute subsidies (either to companies or private users) to encourage the use of different modes of transportation, for instance substituting road transportation by rail or inland waterways transportation for goods transportation. In what concerns the private transportation, an important measure is to benefit and encourage the use of public transportation, taking advantage of the lower price and lower CO 2 emissions of the public transportation compared with the private one. A good option for Portugal would most probably be the development of railway infrastructures and a better integration between the various modes of transportation. In the period, the role of the railway transportation decreased when compared with other modes of public transportation, namely the road transportation. In fact, taking in 80

90 consideration the evolution in the passengers number transported in those years, the contribution of the railway transportation decreased from 27.5% to 20.3%, the road transportation increased from 67.9% to 74.9%, the inland and waterways transportation decreased from 3.8% to 3.7% and the air transportation increased from 0.8% to 1.1%. 74,9 67,9 27,5 20, ,8 3,7 0,8 1,1 Railway Road Inland & Waterways Air Source: DGTT,1999 Figure 26 National passenger transportation in Values in % As the previous figure shows, the public transportation in Portugal had an evolution towards the road transportation, which contributes more heavily to the GHGs emissions. According with an assessment report from the European Environment Agency s (EEA, 2000), demand management policies are needed to de-link transport growth from economic growth and to improve the balance between various modes of transportation, since current transport revenues only partly cover the significant external costs of the sector, and current prices tend to favour road transport over public transport, contributing for an increase in GHGs emissions. The European Union s Green Paper (1995) suggests the internationalisation of the external costs of transportation, since it is quite obvious that the current road taxation fails deeply in covering transportation external costs (such as local air pollution, accidents, congestion, climate change, noise, etc.). According with an independent study performed at the European level - in the 15 member states, Norway and Switzerland - entitled The Environment and the External Costs of 81

91 Transports 10, in Portugal the external costs of transports represent around 13% of the GDP. When analysing the external costs of the different modes of transportation, it is possible to conclude that a passenger travelling by train has an environmental cost of 4 PTE/kilometre compared with 12 PTE/kilometre when travelling by car. In what concerns the transportation of goods, the relationship is essentially the same, 5 PTE/ton.kilometre in the railway compared with 16 PTE/ton.kilometre when travelling by road. These results suggest an incentive to other modes of transportation, rather than road transportation and also the internalisation of the external costs of transportation. For the transportation system to be sustainable and efficient, one should be able to decide based on own needs. This can only be achieved through a fair pricing policy. As a matter of fact, pricing is one of the key policy tools for promoting an environmentfriendly balance between different forms of transport. However, current prices tend to favour private road transport over public transports. For example, rail and bus fares have increased more rapidly than gross domestic product (GDP) over the past decade, while the price of driving a private car has largely remained stable (EEA, 2000) 11. Transport externalities accountability is very important because in a market economy consumer decisions are, of course, highly dependent on prices. In the situation where market prices do not reflect and accomplish the existing scarcities, society does not attain the welfare situation. It is expected that internalisation of external costs will result in technological improvements and increases in operational and organisational efficiency. One option to include the externalities in the transportation prices, although not a popular one, can be the increase of fuel taxes, since they provide the highest contribution to revenues from all the environmental taxes. The increases of fuel taxes can be used to encourage a shift towards more environment-friendly fuels or to more environmentally modes of transportation, as it tend to stimulate energy savings through technical-efficiency improvements and therefore reduce fuel demand. A complementary measure to fuel taxes strategy is the introduction of marginal cost-based charges, such as electronic kilometre charges for trucks (EEA, 2000) and the introduction of an effective road pricing policy. Another possible response to reduce emissions may be the development of new propulsion systems that contribute to reduce energy consumption and consequently the GHGs emissions. Electric or hybrid propulsion systems, which have a lower environmental impact, can be very important to reduce emissions. In fact, one of the requirements of the Integrated Pollution 10 In ( 11 Are we moving in the right direction? Indicators on transport and environment integration in the EU ; 2000; European Environment Agency; Copenhagen in Environmental signals

92 Prevention and Control (IPPC) Directive is to use the Best Available Technology and to improve energy efficiency. Innovations in advanced materials can also be important to reduce vehicle weight, allowing an easier vehicle recycling and contributing to production flexibility. Moreover, new vehicle production process management techniques will improve quality and reduce costs (IPTS, 2000). On the other hand, according with a survey performed at the national level, by the National Center for Energy Conservation focusing the drivers that use automotive vehicles 4 or 5 times a week, there is a general lack of information in what concerns the environmental/energy issues. The majority of them does not have knowledge about them and therefore do not consider them essential. Moreover, the typical Portuguese driver has low environmental consciousness as a result of the lack of information. Answering the questions about price raises or the possible inclusion of taxes, the major result is that the cost factor influences all the decisions. Based on these results, it is important to develop informative actions since it is the only way for users to take conscious decisions. Despite all the possible actions, as far as climate change is concerned, the transportation sector will unlikely cease to be one of the main contributors, since it is one of the sectors that better reflects the increase in the quality of life. Although there might be solutions that allow the mitigation of the GHGs emissions growing pattern, they should be considered and implemented, as an integrated solution because a unique solution will unlikely be efficient or sufficient Energy sectors The dominant human activity or driving force for climate change is fossil-fuel (coal, oil, gas) combustion, due to its carbon dioxide emissions, which are still the predominant energy source for electricity production. The energy sector has an important role in climate change, as it is the main source of sulphur dioxide emissions and a significant source of carbon dioxide and nitrogen oxide emissions (EEA, 2000). Energy policy is an element of infrastructure policy and thus is important for competitiveness and growth, at the same time it is a crucial element of environmental policy, since the generation and use of fossil fuels goes along with negative national and international external effects (European Parliament, 1999). Energy policy has not only environmental benefits at the national level, it also concerns cost competitiveness of firms and prices for electricity, gas and heating in private households. Energy policy is, therefore a politically and economically sensitive issue that has to be well planned and implemented. 83

93 Electricity generation is the energy sector s main activity, with almost half the electricity produced in thermal power plants using fossil fuels (EEA, 2000). In Portugal, the percentage of hydropower is however significant, which represents an advantage. In fact, despite recent increase in wind and solar power in European countries, hydropower remains the main renewable energy source. Portugal can also benefit from being a sunny country and should develop effective policies to incentive solar power for electricity and heat production. In fact, the major energy policy measures recently implemented in Portugal, besides the introduction of natural gas, were focused on the use of renewable energies, in the liberalisation of the electrical sector, in legislation on the consumption, and the creation of incentives to better use energy (DGTT, 1999). Photovoltaic cells allow converting sunlight directly into electricity and are already cost-effective in many applications remote from the power grid. Improved efficiencies and reduced production costs promise to cut the cost of solar electricity by half within the next decade. Thin film technology allows photovoltaic to be integrated into buildings materials, such as roofing shingles and facades, further reducing net system costs (Energy Innovations, 1997). The high level of energy consumption verified in EU member countries is partly due to the low fuel prices. Historically, energy demand fell sharply only after the price rises sparkly by the 1973 and 1979 oil crises. For instance, since diesel price remains significantly cheaper, compared with unleaded petrol, this offers little incentive for private car owners to switch from diesel to less-polluting unleaded petrol. Without the increase in taxes for many fuels, there will be low incentive to use renewable sources of energy or low polluting fuels, and to reduce its consumption. Thus, policies to increase and incentive the contribution and use of renewable forms of energy, such as wind, biomass, geothermal and solar are needed, although intensified price competition in the context of a liberalised European Union electricity market could undermine earlier prospects for a rapid expansion for the share of renewables, except if there is governmental intervention. The energy price is expected to decrease due to the liberalisation of electricity markets, since increased liberalisation of world trade will bring newly accessible supplies of fuel. On one hand, the liberalisation of energy markets will likely encourage competition, which can result in more efficient generating technologies, on the other hand it can also lead to falling electricity prices and consequently act as an incentive to energy consumption, and also to industry restructuring in a more competitive European market. There will be effects on international capital markets, to the extent that there will be a relocation of energy intensive industries or intensified merger and acquisition activities in the energy sector or in energy intensive industries facing sharper price and cost competition (European Parliament, 1999). 84

94 Indeed, any environmental benefit associated with this development can be offset as increased competition can reduce energy prices, and consequently increase the demand for energy and consequently the emissions. Therefore, the goal for the sector may be to increase the environmental efficiency of its own production, since about 60% of energy input is lost as heat during the electricity production process (EEA, 2000). One measure might be the use of heat produced in local applications and invest it in combined heat and power plants for distinct heating and industrial use. However, given the limited size of these applications, the order of magnitude of energy lost will probably not change significantly. Other measure is to change the fossil fuel mix towards a less carbon-intensive energy system. Although, generally this applies to all the sectors, the power sector has shown much more flexibility than the transport sector in modifying the primary input mix (IPTS, 1997). The shift from coal to gas for electricity production as well as the use of Best Available Techniques (BAT) in power plants, (following the Integrated Pollution Prevention and Control Directive), would contribute to the reduction of CO 2 and acid gas emissions. However, a more important role for gas, in turn, will mean increasing price risks with respect to changes in natural gas price. Innovative technologies can contribute to a possible structural change within the energy markets, leading to a less carbon-intensive exploitation system. However, the development of new technologies will most probably have to be supported by R&D policies that contribute to facilitate fuel substitution, in order to move away from fossil fuel based technologies, as well as for CO 2 removal and sequestration and also to develop new electricity production systems. A possible solution, according with Energy Innovations (1997), can be to give incentive for modernising the industrial capital stock, by providing a 10 percent tax credit for investments in new manufacturing equipment, paid for by fees or purchased energy. This would encourage investment in new efficient production equipment that would increase productivity, while reducing energy consumption and pollution. Another option is to use taxation policies. The use of taxation policies should differ between fuel type and between the domestic, industrial and transport sectors. From the theoretical perspective of an optimal allocation it makes sense to internalise negative external effects from emissions and positive effects from R&D, while using ecological tax revenues to finance R&D promotion, which will likely bring long-term benefits. Note however that, without further investigation, it is unclear how many benefits it will bring. Higher R&D expenditures allow a faster accumulation of the R&D capital stock, which plays a positive role in macroeconomic and sectoral development. The increased R&D capital stock contributors to higher growth and thereby eliminates the negative output effect observed in most simulations on the effects of the standard ecological taxes (European Parliament, 1999). According with a study performed by the European Parliament, raising energy prices in some form becomes a natural strategy for many market economies. The so-called ecological tax 85

95 (including energy/ CO 2 taxes) is one possible option for policymakers. Energy pricing and ecological taxes are core elements of sustainable energy policies in industrialised countries. A ecological tax reform basically will raise energy prices and therefore give incentives for firms and consumers to save energy by adjusting the input structure on the one hand, and the input mix on the other. At the same time there will be incentives for industry to come up with energy saving innovations and new technologies. Given the diverging intensities of industries, raising energy prices is likely to have different impacts across sectors both in terms of output and employment. However, revenue from energy taxes sometimes reflects more of an interest from governments in raising revenue than in reducing fuel use. Taxes are high for transport fuels and much lower in industry, reflecting government policies not to harm the competitiveness of their industries in international markets. Energy is often regarded as a basic consumer right, for which governments are responsible to ensure availability, delivery and a fair price through regulatory and taxation instruments. Actually, the very purpose of the ecological tax, namely to improve the environment, could be seriously undermined if there were strong adverse secondary effects. The better use of taxation would be to switch from an electricity tax towards an explicit CO 2 tax, introducing an element to strongly promote R&D in order to reinforce economic growth and to encourage emission-saving product and process innovations. This way, the competitiveness of the renewable energies would be much more effective and would benefit a lot from this initiative (IPTS, 1997). Moreover, the tax should be based on adequate scientific analysis so that tax rate is neither excessive nor too low to achieve an internalisation of external effects Other Measures Besides having focused more on the transportation and energy sectors, since they are the major contributors of GHGs, other measures can also be suggested to mitigate the GHGs emissions. Other policy actions may be to reduce the amount of organic waste in landfills, thus reducing methane emissions and to collect landfill gas for energy use. Another possible solution, although with a significant level of uncertainty, is to develop strategies to increase forestation areas, intensifying the total forest carbon sink, and regulations on energy efficiency of buildings. Indeed, dramatic reductions in energy requirements are achievable by using highefficiency components in integrated designs that exploit synergies among building elements. For example, incorporating passive solar features and efficient lighting allows a reduction in 86

96 the size of space conditioning equipment; incorporating whole-building control systems can further reduce operating costs while improving occupant comfort and productivity (Energy Innovations, 1997). These measures may be viewed as a necessary effort to conduct the status of the world energy system, from a non-sustainable situation to a sustainable one. The practical question is how to assign properly R&D and subsidies in order to foster the transition towards a more sustainable energy system, compatible with other main policy objectives, such as energy supply, and improving the competitiveness and efficiency of national industries. As we can easily conclude, there are several feasible and complementary options to reduce or mitigate greenhouse gas emissions, each one more appropriated regarding the situation, and to keep in pace with the Kyoto commitments, but this requires political determination and willingness to take action. 5.2 Conclusions This thesis has applied a new methodology for the analysis of environmental burdens associated with economic activity in Portugal, the Environmental Input-Output Analysis. The environmental input-output analysis proved to be a powerful methodology to calculate the greenhouse gas emissions associated with a certain change in the final output of the Portuguese economy. The usefulness of this framework relies on the fact that it is based on the national Input-Output tables provided regularly by the National Statistics Institute (INE) that can be easily used to evaluate any type of environmental burden or social impact, only depending on the nature and quality of publicly available data. The Environmental Input- Output Analysis was applied on the estimation of greenhouse gas emissions, making use of statistical information on economic sectors emissions quantified by the INE. The projections based on economic growth estimations performed by the Direcção Geral de Energia (DGE), present two development scenarios: scenario A, assuming a more dynamic growth and scenario B, considering a more conservative one. Based on these projections, Portugal in 2010 will have largely surpassed the target agreed in Kyoto. The results indicate that there will be an increase of between 129% and 159% in the Global Warming Potential compared with the 27% established in the Kyoto Protocol. This represents a necessity of reducing the National Global Warming Potential in between 87 Mt of CO 2 eq and 106 Mt of CO 2 eq. 87

97 Based on the case study assumptions it is possible to conclude that the National greenhouse gas emissions will largely exceed the Kyoto limits in 2010, leading to serious problems of non-compliance. To revert this tendency efficient and aggressive policy actions should be considered in the short range. These policies should focus mainly on the transportation and energy sectors since they are the major contributors for greenhouse gas emissions and consequently those where the measures will likely have more significant results. The possible measures can vary from the use of renewable sources of energy, taxation policies, development of innovative technologies or the use of different modes of transportation. However, it is clear that only the application of integrated policies and measures can ensure the achievement of significant results, contributing to sustainable development. The usefulness of the methodology developed in this work, enforces the necessity of improving the National data gathering system to extend the input-output methodology to different types of environmental calculations. The quantitative and qualitative improvement of the data available will allow the inclusion of more detailed and extensive data, thus increasing the possible level of analysis and the quality of the results. Since this methodology is based on the national accounts, it stands on public and reliable economic data, ensuring credible results given that it guarantees the inclusion of all economic linkages. The method has also the advantage of being simple and easy to use and understand. This work provides the methodological knowledge and the inputs for decision-makers consciously decide upon the different options and results. However, a lot of further work has to be performed before the EIO methodology is capable to produce important results. The first action would be to characterise and disaggregate the Portuguese economy in more than 49 sectors, which is already being considered in the input-output tables for 1998 that will be released soon and will encompass 150 economic sectors instead of 49. Only a considerably disaggregating level can allow taking conclusions and performing analysis at the process level. Moreover, a more systematic data gathering system ought to be implemented because only having the right quantity and quality of data available will permit to achieve feasible and uncontradicting results. Like the sectoral GHG inventory already available other environmental burdens or indicators should be systematically collected by economic sectors in order to have a better knowledge of the environmental impacts in the future. 88

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