Professional Documents
Culture Documents
n
i
n
j
ij
n
i
ij
j
z
n
z
n
U
1 1
2
1
.
1
1
(1)
where: U
j
= absorption power index of industry j, n = number of rows or columns in the
matrix, z
ij
= element ij of matrix (I A)
-1
. This index measures in relative terms, the power
of any given industry to dragging along, or pulling, the whole economy, also called
Backward Linkage.
Similarly, with the dispersion effect, the Dispersion Power Index is calculated by an
equation, based on the distribution matrix:
n
i
n
j
ij
n
j
ij
i
z
n
z
n
U
1 1
2
1
.
1
1
(2)
where: U
j
= dispersion power index, n = number of rows or columns in the matrix, z
ij
=
element ij in matrix (I D)
-1
. This index measures in relative terms the impact produced by
one industry over the rest, also called Forward Linkage. The results are shown in Table 4.
Low Carbon Strategy for Mexico: I-O Model. Final Report
Table 4
No. Industry B.L. No. Industry F.L.
1 30 Computer, communications and electronic equipment manuf. 2.1345 24 Chemical product and preparation manufacturing 3.7554
2 31 Electric lighting equipment and household appliance manuf. 1.5614 6 Oil and gas extraction 3.6203
3 32 Transportation equipment manufacturing 1.4964 35 Wholesale and retail trade 3.4202
4 17 Textile product mills 1.4418 30 Computer, communications and electronic equipment manuf. 2.7352
5 34 Other miscellaneous manufacturing 1.3904 23 Petroleum and coal products manufacturing 2.6556
6 16 Textile mills 1.3437 27 Iron and steel mills and manufacturing 2.6410
7 25 Plastics and rubber products manufacturing 1.3430 61 Professional, scientific, and technical services 2.2770
8 28 Fabricated metal product manufacturing 1.3071 63 All other administrative and support services 2.1490
9 18 Apparel manufacturing 1.3051 25 Plastics and rubber products manufacturing 1.6122
10 21 Pulp, paper, and paperboard mills and manufacturing 1.3009 31 Electric lighting equipment and household appliance manuf. 1.5794
11 9 Electric power generation, transmission, and distribution 1.3005 32 Transportation equipment manufacturing 1.5783
12 19 Leather and allied product manufacturing 1.2862 21 Pulp, paper, and paperboard mills and manufacturing 1.5498
13 29 Machinery and equipment manufacturing 1.2844 9 Electric power generation, transmission, and distribution 1.4761
14 22 Printing and related support activities 1.2546 16 Textile mills 1.4190
15 33 Furniture and related product manufacturing 1.2526 58 Real estate 1.3657
16 36 Air transportation 1.2511 39 Truck transportation 1.3381
17 27 Iron and steel mills and manufacturing 1.2472 28 Fabricated metal product manufacturing 1.3178
18 57 Insurance carriers, pension funds, and related activities 1.2071 1 Crop production 1.1710
19 46 Warehousing and storage 1.1767 57 Insurance carriers, pension funds, and related activities 1.1217
20 5 Support activities for agriculture and forestry 1.1691 51 Telecommunications 1.1110
21 14 Food manufacturing 1.1631 55 Credit intermediation and related activities 1.0970
22 24 Chemical product and preparation manufacturing 1.1630 7 Metal ores and nonmetallic mineral mining 1.0877
23 8 Support activities for mining 1.1247 29 Machinery and equipment manufacturing 1.0132
23 SELECTED INDUSTRIES OF THE 2008 I-O MATRIX OF MEXICO
Backward and Forward Linkages Rasmussen Method
Low Carbon Strategy for Mexico: I-O Model. Final Report
32
In Table 4 the results of the calculation of Backward and Forward Linkages Indexes
according the Rasmussen method, for 23 industries of the I-O Matrix of Mexico of 2008,
are shown. These are the industries with the higher Absorption and Dispersion Indexes
respectively. They form two groups the intersection of which is made up of 13 industries
having at the same time high Backward Linkage indexes and high Forward Linkage
indexes. Those are: Electricity, Textile mills, Paper products, Chemical products, Plastics,
Iron and steel mills, Metal products, Machinery and equipment, Computer and electronic
equipment, Electric lighting equipment and household appliances, Transportation
equipment and Insurance carriers.
b) Linkages determined through the extraction method
We also estimate forward and backward inter-industry linkages through the so-called
extraction method originally postulated by Guido Cella (1984) and further developed by
Eric Dietzenbacher (1993, 1997). We also used two matrices with this method: the
absorption matrix and the distribution matrix. This makes possible to evaluate linkages as
impulses produced either by demand or by supply.
The extraction method works as follows: 1) Given the vector of final demands, the
output is calculated for each of the n sectors or industries; 2) Next, one of these n industries
is hypothetically extracted from the economy by deleting its corresponding row and column
from the matrix A of input coefficients; 3) Using the reduced vector of final demands, the
hypothetical output is computed for each of the remaining n 1 sectors; 4) The effect of
extracting this particular industry is then obtained from the differences (summed over the
remaining industries) between the two types of output. The magnitude of the difference is
indicative of the relevance of the hypothetically extracted industry (Dietzenbacher, et al.,
1993, p.3). The results for the first 23 industries with the highest backward and forward
linkages are presented in Table 5, expressed as the absolute value of the extraction impact
of the corresponding industry and its per cent value with respect to the total of 79
industries. Among these the main non-services industries are the following: Oil and gas,
Electricity, New non-residential construction, Food, Petroleum and coal products, Chemical
products, Plastics, Non-metallic mineral products, Iron and steel, Fabricated metal
products, Machinery and equipment, Computer and electronic equipment, Electric
equipment and household appliances, Transportation equipment and Truck Transportation.
Low Carbon Strategy for Mexico: I-O Model. Final Report
33
Table 5
No. Industry Mill Pesos % No. Industry Mill Pesos %
1 35 Wholesale and retail trade 2,078,601 9.24 35 Wholesale and retail trade 2,047,764 9.13
2 32 Transportation equipment manufacturing 1,205,574 5.36 6 Oil and gas extraction 1,906,972 8.50
3 23 Petroleum and coal products manufacturing 1,198,529 5.33 24 Chemical product and preparation manufacturing 1,508,612 6.73
4 14 Food manufacturing 1,189,604 5.29 23 Petroleum and coal products manufacturing 1,427,409 6.36
5 11 New nonresidential construction 1,181,013 5.25 27 Iron and steel mills and manufacturing 912,760 4.07
6 24 Chemical product and preparation manufacturing 1,106,394 4.92 61 Professional, scientific, and technical services 877,789 3.91
7 6 Oil and gas extraction 895,413 3.98 14 Food manufacturing 833,334 3.72
8 30 Computer, communications and electronic equipment manuf. 887,077 3.94 32 Transportation equipment manufacturing 805,419 3.59
9 9 Electric power generation, transmission, and distribution 778,074 3.46 30 Computer, communications and electronic equipment manuf. 779,187 3.47
10 27 Iron and steel mills and manufacturing 769,470 3.42 9 Electric power generation, transmission, and distribution 661,624 2.95
11 61 Professional, scientific, and technical services 746,159 3.32 39 Truck transportation 625,102 2.79
12 39 Truck transportation 681,153 3.03 63 All other administrative and support services 604,108 2.69
13 31 Electric lighting equipment and household appliance manuf. 538,344 2.39 25 Plastics and rubber products manufacturing 600,765 2.68
14 12 New residential construction 538,186 2.39 31 Electric lighting equipment and household appliance manuf. 597,494 2.66
15 25 Plastics and rubber products manufacturing 494,765 2.20 11 New nonresidential construction 588,680 2.62
16 28 Fabricated metal product manufacturing 449,909 2.00 28 Fabricated metal product manufacturing 476,117 2.12
17 63 All other administrative and support services 444,425 1.98 58 Real estate 431,426 1.92
18 26 Nonmetallic mineral product manufacturing 413,102 1.84 1 Crop production 412,586 1.84
19 2 Animal production 400,806 1.78 55 Credit intermediation and related activities 396,982 1.77
20 1 Crop production 393,580 1.75 26 Nonmetallic mineral product manufacturing 363,355 1.62
21 51 Telecommunications 382,499 1.70 51 Telecommunications 336,676 1.50
22 58 Real estate 367,928 1.64 7 Metal ores and nonmetallic mineral mining 329,506 1.47
23 79 Federal State and local Government activities 353,974 1.57 2 Animal production 321,670 1.43
Total selected industries 77.76 Total selected industries 79.56
Forward Linkage Impact Backward Linkage Impact
23 SELECTED INDUSTRIES OF THE 2008 I-O MATRIX OF MEXICO
Backward and Forward Linkages Impacts by Extraction Method
Low Carbon Strategy for Mexico: I-O Model. Final Report
34
2. Main IOM sectors emitting GHG
The identification of the main polluting industries, in this case the main GHG generators, is
crucial for estimating polluting costs, according to the various input-output models
developed in this regard (Leontief, 1970; Aroche, 2000; Lenzen et al., 2004; Munksgaard et
al., 2005).
a) GHG emissions for the IOM sectors
In order to calculate the GHG emissions in CO
2
equivalent, for each industry of the 79 in
the IOM, we began by analysing the information of the National Greenhouse Gas
Inventory produced by the National Ecology Institute (INE). The GHG emissions are
expressed in Giga-grams of carbon dioxide equivalent (Gg CO
2
eq.), that result of summing
up the emissions of six gases: carbon dioxide (CO
2
), methane (CH
2
), nitrous oxide (N
2
O),
hydro fluorocarbon (HFC), per-fluorocarbons (PFC) and sulphur-hexafluoride (SF6). The
first three together represent 99 per cent of total GHG emissions, while the last three, the
remaining one per cent.
Information regarding these GHG emissions is classified in six sources following
the methodology guidelines of the IPCC which are, in order of importance: 1) Energy, 2)
Industrial processes, 3) Chemical solvents, 4) Agriculture, 5) Land use and forestry and, 6)
Waste disposal. Each of these emission sources is called a sector which is, in turn, divided
into categories and sub-categories. The names given to these sectors and sub-sectors do not
correspond to the economic classification terminology and aggregation criteria of any
national income accounts system.
Next, there was a process of matching the IPCC categories to those of the IOM. For
those industries of the IOM not included explicitly as GHG emission generators, we had to
assign values corresponding to their relative participation in the total of GHG emissions. In
that case we use the relative share of each industry in the Gross Output of the same year,
for estimating these GHG emissions. We, thus, obtained 79 estimates of GHG emissions in
each and every one of the industries in the IOM, measured in CO
2
eq. Then we ordered the
list of emissions from the highest to the lowest. The first 26 GHG emissions generator
industries which are shown in Table 6 produced together 98.5 per cent of all GHG in the
economy.
Low Carbon Strategy for Mexico: I-O Model. Final Report
35
b) Coefficients vector of industries GHG emissions
With the information we had so far gathered or estimated, we calculated the vector of
coefficients of GHG emissions by industry, normalizing the emission values with respect to
the 2003 Gross Output corresponding values, according to the equation:
i i i
x E e
(3)
Table 6
No. Industry GHG Emissions % of
Gg CO2 eq total
1 9 Electric power generation, transmission, and distribution 176,124.8 23.7
2 39 Truck transportation 91,189.0 12.3
3 3 Forestry and logging 69,980.2 9.4
4 64 Waste management and remediation services 61,865.8 8.3
5 40 Transit and ground passenger transportation 61,552.9 8.3
6 10 Water, sewage and natural gas distribution 53,220.4 7.2
7 6 Oil and gas extraction 46,672.5 6.3
8 2 Animal production 39,055.3 5.3
9 26 Nonmetallic mineral product manufacturing 34,429.1 4.6
10 27 Iron and steel mills and manufacturing 30,713.2 4.1
11 1 Crop production 11,031.6 1.5
12 79 Federal State and local Government activities 8,108.5 1.1
13 12 New residential construction 7,520.4 1.0
14 36 Air transportation 6,094.3 0.8
15 24 Chemical product and preparation manufacturing 5,857.3 0.8
16 7 Metal ores and nonmetallic mineral mining 5,146.9 0.7
17 23 Petroleum and coal products manufacturing 4,686.2 0.6
18 11 New nonresidential construction 3,174.9 0.4
19 8 Support activities for mining 2,844.6 0.4
20 43 Transportation support activities 2,400.6 0.3
21 37 Rail transportation 2,230.3 0.3
22 51 Telecommunications 1,922.7 0.3
23 38 Water transportation 1,848.5 0.2
24 42 Scenic and sightseeing transportation and support activities 1,457.6 0.2
25 15 Beverage and tobacco manufacturing 1,342.0 0.2
26 14 Food manufacturing 1,183.0 0.2
Total selected industries 731,652.6 98.5
All industries 742,436.2 100.0
GHG EMISSIONS BY SECTOR IN MEXICO 2008
Selected Industries
Low Carbon Strategy for Mexico: I-O Model. Final Report
36
where: e
i
= annual emission coefficient of industry i; E
i
= annual (2003) Giga-grams of
GHG produced by industry i; x
i
= annual gross output of industry i in millions of Pesos; i =
(1, 2, 3, 79).
Table 7 shows the list of industries with GHG emissions coefficients above the
average, which were 15 out of 79.
There are in Tables 6 and 7, eight industries which are high pollutants both in
absolute and in relative terms: Animal production, Forestry and logging, Electricity, Water,
sewage and natural gas distribution, Non-metallic and minerals, Truck transportation,
Transit and ground passenger transportation and Waste management and remediation
services.
3. Key and High Pollutant sectors
We find that the key or strategic sectors of the Mexican economy according to its IOM
matrix are: first in importance those related directly or indirectly to the fossil fuel
combustion sector: Oil and gas; Electricity, Petroleum and coal products, Chemical
products, Plastics. A second group was that related to metals and minerals: Mining, Iron
and Steel, Metallic products and Mineral products. A third one is related to various types of
machinery, equipment and appliances production: Machinery and equipment, Computer
and electronic equipment, Electric lighting equipment and household appliances and
Table 7
No. Industry Emissions Gross Output Intensity
Gg CO2 eq. Mills Pesos coefficient
1 64 Waste management and remediation services 61,866 7,714 8.020
2 3 Forestry and logging 69,980 25,988 2.693
3 10 Water, sewage and natural gas distribution 53,220 35,139 1.515
4 9 Electric power generation, transmission, and distribution 176,125 543,566 0.324
5 42 Scenic and sightseeing transportation and support activities 1,458 5,856 0.249
6 2 Animal production 39,055 254,792 0.153
7 40 Transit and ground passenger transportation 61,553 414,278 0.149
8 39 Truck transportation 91,189 629,376 0.145
9 26 Nonmetallic mineral product manufacturing 34,429 260,699 0.132
10 38 Water transportation 1,848 22,022 0.084
11 36 Air transportation 6,094 76,258 0.080
12 27 Iron and steel mills and manufacturing 30,713 435,093 0.071
13 37 Rail transportation 2,230 34,468 0.065
14 7 Metal ores and nonmetallic mineral mining 5,147 107,720 0.048
15 6 Oil and gas extraction 46,672 1,132,166 0.041
Selected Industries Total 681,581 3,985,133 0.171
All industries 742,436 20,762,760 0.036
MAIN GHG EMISSIONS COEFFICIENTS BY SECTOR IN MEXICO 2008
Low Carbon Strategy for Mexico: I-O Model. Final Report
37
Transportation equipment. Finally there are also two other industries: Non-residential
construction and Truck transportation. We can say that all in all only 15 sectors or
industries can be defined as strategic, out of the 79 industries that made up the economic
structure according to the North American Classification System (NAICS).
With respect to high GHG emissions industries we find that in the same
classification the important groups are about the same as the strategic ones, except for the
machinery, equipment and appliances related industries which are not high pollutants.
Instead we add five industries related to transportation (other than truck which was already
included): ground, rail, water, air and scenic transportation. Also, three primary activities:
Crop production, Animal production and Forestry and Logging. Finally, we must add,
Waste management and Water sewage and natural gas distribution, for a total of twenty 21
high pollutants sectors.
In the intersection of this big two sets there are three subsets. In the first group in
order of importance, there are only three industries highly strategic for their linkage indexes
and highly pollutant for their absolute and relative GHG emissions, at the same time:
Electricity, Iron and Steel and Truck transportation. It seems convenient to include in this
group another industry, Oil and gas, a high GHG producer and with important forward
linkages but less important backward. In a second group there are two industries: Forestry,
one of the highest GHG emitters but with a low level of inter-industrial connection and
Mining, which always appears second in all groups. This latter group of six industries is
what we may define as the strategic-pollutant sector. On a second level of strategic
importance, but with a high level of energy consumption and GHG emissions are five
industries, which are all associated to transportation services: Air transportation, Rail
transportation, Water transportation, Ground passenger transportation and Scenic
transportation. From our analysis, it is this whole set of eleven industries, which is no doubt
the most relevant to deal with for purposes of GHG emissions mitigation.
Low Carbon Strategy for Mexico: I-O Model. Final Report
38
V. ENVIRONMENT INPUT-OUTPUT MODEL FOR MEXICO
1. Environment Input-Output models
Since Leontiefs works on pollution cleaning up issues (Leontief, 1970, 1973), there have
been various I-O models and analytical devices developed from them. Some advances
appear in input-output textbooks, for instance Miller and Blair (1985, 2009) Ten Raa
(2005); others have been I-O models or analytical instruments applied to particular cases of
sectors and/or regions or countries, for example: Duchin, and Lange (1992, 1994), Kratena
and Scheicher (1999), Idenburg and Wilting (2004), Lenzen, Pade and Munksgaard (2004)
Wilting, Faber and Idenburg (2004), Kelly (2006), and Brink and Idenburg (2007).
From a theoretical approach to the Pollution cleaning model, there have also been
some developments, the most mentioned in the literature are: Steenge (1978), Lowe (1979),
Qayum (1991), Arrous (1994), Lager (1998) and Luptacik and Bhm (1999).
Leontiefs model, which may be called standard Environmental Input-Output model
(EIO), is usually described as:
_
I -A
11
-A
12
-oA
21
I -oA
22
_ j
x
1
x
2
[ = j
y
u
[ (4)
where: A
11
= square matrix of conventional input-output coefficients; A
12
= coefficient
matrix of economic inputs per unit level of abatement activities; A
21
= matrix showing
environmental pollution per unit of production by the conventional sectors; A
22
= matrix
showing pollution generated as a by-product of abatement activities; x
1
= vector of
production levels of the conventional sectors; x
2
= levels of abatement activities; y = vector
of final demand for conventional goods; = diagonal matrix with the percentage of the
pollution which has to be eliminated.
All the above mentioned authors have found that this model is characterised by a
number of assumptions in the way it is formulated that cause limitations of various types
when it comes to be applied for policy evaluation with respect to air pollution (Steenge,
1978, p. 482; Lowe, 1979, p.112; Qayum, 1991, p.428; Arrous, 1994, p.106; Lager, 1998,
p.205; Luptacik and Bhm, 1999, p.265; Brink & Idenburg, 2007, p.3).
Leontief's system as represented by equation (4) has become an important
framework for addressing economy-environment relationships. The approach is, however,
Low Carbon Strategy for Mexico: I-O Model. Final Report
39
characterized by a number of assumptions that cause some problems with the
implementation of the model for environmental policy analysis. These have been pointed
out and dealt with in several studies. We discuss three of them that are relevant for the
analysis of environmental policies with respect to GHG emissions.
In the first place pollution is supposed to be eliminated once it is released into the
environment (surface water, atmosphere, etc.). Although this might be the case for certain
types of pollution (like waste for example), in the case of most gaseous substances (like
greenhouse gases and air pollutants), once they are released into the atmosphere it is hardly
possible to eliminate them (Lager, 1998). Instead, pollution has to be reduced at the source
through the use of less polluting alternative production technologies. This can be achieved
through the substitution of conventional production technology by less polluting production
technologies or else by applying add-on abatement technologies to conventional production
technologies. This has two important implications: (i) abatement activities (and their cost
and effect) are directly related to the pollution at the various specific sources, and (ii)
different substitution and add-on technologies will be available for each of the various
sources, which implies that the cost of reduction and the reduction potentials are sector-
specific.
Secondly, in the standard EIO model, it is assumed that the degree of abatement i.e.
the proportions of pollutants eliminated, represented by in (4) are exogenous to the
model. Moreover, the proportional emission reduction is the same for each sector. With
abatement taking place once pollutants are released into the environment this might be
right, because the abatement cost for a unit of pollution are the same, regardless the source
of pollution. The approach implies that the cost of abatement is spread over the sectors
according to their relative contribution to total pollution. In the context of sector-specific
abatement this will not result in an efficient use of scarce resources to reduce environmental
pollution. In fact, it reflects the instrument of environmental policy called command and
control, prescribing the same abatement technology for each sector.
Taking these limitations into account, the authors reformulated the model in a
suitable way to solve the problems found for the analytical purposes they had in mind.
Low Carbon Strategy for Mexico: I-O Model. Final Report
40
2. Pollution abatement and Technological change models
In our review of the literature we found a very limited number of references regarding
applied I-O models specifically relating climate change, mitigation technologies, impacts
and costs evaluation at a national level. Reviewing all of them, we narrowed our criterion
for selection to those coincidental with the purpose of our study, i.e., the analysis of the
introduction of new technologies for GHG emissions reduction on the economy as a whole.
In this particular sense the EIO models applied to the Dutch economy seemed to be the
most adequate. These were two: a dynamic input-output model called DIMITRI and an
optimization of pollution-abatement technologies model.
In DIMITRI a crucial aspect for the dynamics and the introduction of new
technologies are the variables and equations regarding: investment by sector, capital goods
capacity (existing, expected and planned) by sector, depreciation rates by sector, and the
matrix of capital coefficients. The installed technology is a mix of technologies
implemented in previous periods. As a result of depreciation and new investments, the
installed technology in all sectors changes every period. After installing new technologies,
the technological matrix depicts the new installed mix of technologies. The model estimates
the technological matrices for each period. In the price side of this model, the costs are
compiled from the operational costs, the return of capital and a revaluation of the capital
stock. Sectoral prices are accounted for by the model, prices on labour and other value-
added categories are external (Idenburg, 1998; Idenburg and Wilting, 2000, 2004; Wilting,
Faber and Idenburg, 2004).
The Cost-effective pollution-abatement technologies model, developed by B&I
(2007) is not dynamic and it is built with the purpose of studying the effects of the
application of the best GHG abatement technology per sector, choosing one among various
(at least two) alternatives. The selection is based on a total cost analysis implemented in an
optimization I-O model. The technologies considered for election are all add-on
technologies, that is, they do not imply a change in the product or in the production process.
The model is to be applied to a permit scheme which works under free market rules. That is
to say, the authors privilege in their model an environmental policy of GHG reduction
through a permit market system.
Low Carbon Strategy for Mexico: I-O Model. Final Report
41
Our model has important differences with both models, mostly based on restrictions
imposed by the availability of the information regarding the Mexican Input-Output matrix
and National Income Accounts. We have not enough official data about investment, capital
goods capacity and depreciation rates, by sector per year or a matrix of capital coefficients.
All these are required to make the model dynamic in the way DIMITRI is. Neither have we
got various (more than one) pollution-abatement technologies for each sector of the
Mexican economy, not to mention these technologies in a format that makes it possible to
translate them into input-output vectors. These are basic data to build an optimization
model as the one developed by B&I (2007).
Thus, we have from the outset these limitations, although there are also other
differences with these Dutch models that will become apparent in the assumptions and
specification of the Mexican EIO model. The effects that all this has on policy
recommendations are basically that we are not looking for setting the ideal price for a
carbon permit or a carbon tax, but rather for helping the government to induce the right
technology changes in the right sectors for overall GHG emissions reduction.
3. Objectives and assumptions of the Mexican EIO Model
The main purpose of the EIO model for the Mexican economy is to find out under which
conditions will it be possible for the Mexican Government to fulfil its pledge, made as part
of the Copenhagen Accord (den Elzen, et al. 2010), of reducing the countrys GHG
emissions by 30 per cent below 2002 levels by 2020.
The EIO model for Mexico will show how GHG emissions reducing technologies
applied in selected sectors of the economy will reduce overall emissions through their
direct and indirect effects in the economy and it will try to estimate the economic positive
and negative impacts of these measures for costs and demand growth.
The model will assume the application of a set of abatement technologies in the
strategic-pollutant sector and will estimate first its effectiveness in terms of GHG emissions
reduction and second its impacts on growth and on costs of production. An alternative
scenario will be the Business as Usual (BAU) i.e., no technical change tendency of the
economic structure and GHG emissions, taking as external data the macroeconomic
projections for 2020 of local official or international agencies, for Mexico.
Low Carbon Strategy for Mexico: I-O Model. Final Report
42
In a previous study (SEMARNAT, 2009b) and in the present one we used the Input-
Output approach to measure and identify the most polluting sectors of the economy, the
strategic sectors of the economy and the intersection of these two groups. Each of these
studies was carried out with information for different years and they did in fact yield
somehow different results. In the present case the result was a definition of a subset of both
strategic and high GHG emitting industries we called the strategic-pollutant sector.
Together they represented almost 60 per cent of GHG emissions in Mexico in 2008. The
group, made up of six industries that we define as the strategic-pollutant sector, is no doubt
the set of industries most relevant to deal with for purposes of GHG emissions mitigation.
It is in this sector where the change of technology must occur in the direction from a
currently using technology to the best available GHG reduction technology not in use in
Mexico but somewhere else. This technology should not be an end-of-the-pipe abatement
technology, but one that modifies the production process so as to reduce the GHG
emissions inside the process itself.
The decision on which technology is applied in a variety of existing technologies or
the same production process is not taken by profit maximizing agents operating in a free
market, but by the state decision agency.
4. The model and the scenarios
a) Production pollution model
We start with the usual solution to the Input-Output model:
x
t
= (I A
t
)
-1
y
t
(5)
where: x
t
= gross output measured in economic terms, in time t; A
t
= technical coefficients
matrix in time t; y
t
= final demand or Gross Domestic Product (GDP) vector in time t.
We now introduce the equation of GHG pollution by-products:
x
p
t
= x
t
(6)
where: x
p
t
= vector of pollution levels measured in GHG units; = diagonal matrix of GHG
emissions per unit of output x; t = 0, 1, 2....12, being t =0 (2008) the base year and t = 12
(2020) the end year.
By combining (1) and (2), we get:
x
p
t
= (I A
t
)
-1
y
t
(7)
for all t 6. And,
Low Carbon Strategy for Mexico: I-O Model. Final Report
43
x
p
t
=
+
(I A
+
t
)
-1
y
t
(8)
for all t 7. Where: A
+
t
= estimated matrix for t = 7 modified with new technologies in the
industries of the energy sector represented as new vectors in matrix A.
The basic idea is to estimate absolute and relative differences between the variables
x
p
t = 0
and x
p
t = 12
, that is, the pollution levels, between the base year and the end year,
assuming a fixed GDP annual growth rate g
y
= y
t
/y
t-1
(y = gross domestic product) during
the period t = 2 to t = 12, while the rest, that is, t = 0, t = 1, and t = 2 will be actual data,
taken from official sources.
b) Variables determination:
- Observed variables are all t = 0 variables, plus y
t = 1
, and y
t = 2
. These, and the matrices A
and , are all taken from information gathered from official sources or estimated on its
basis.
- The forecasted vector is y
t = 3,,12
- The exogenous variable are matrix A
+
which is matrix A, modified in the input vectors of
the energy sectors industries, and
+
.
- The unknown vectors, estimated by the model are: x
p
t 0
, x
t 0
; and all p
t 0
.
c) The scenarios
We have four alternative scenarios:
- Scenario (S1): no technical change and a constant growth rate of GDP of 3.5 per cent a
year, from year 2 to year 12. This assumption is founded on the base line of SEMARNAT
study (SEMARNAT, 2009a). We find out how much GHG emissions grow by sector in the
period of constant high growth rate and no technical change.
- Scenario (S2): no technical change and a constant growth rate of GDP of 1.7 per cent a
year, from year 2 to year 12. We find out how much GHG emissions grow by sector in the
period of constant low growth rate and no technical change.
- Scenario (S3): there is a change in technology in six industries of the strategic and high
pollutant group. The technical change introduced is aimed to reduce GHG emissions to the
least possible in all these industries but directly in none other. Technical change is assumed
to initiate in year 4 (2012) but it finds its maturity in year 7 (2015) so from then on matrix
A becomes A
+
. This assumption is based on the observed period between the initial year
that GHG emissions reduction expenses were made in Canada in each sector and the year
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44
that effective reductions occurred. It is assumed a constant growth rate of GDP of 3.5 per
cent a year from year 2 to year 12. We find out how much GHG emissions grow by sector
in the period, t = 7 to t = 12 of a constant high growth rate and with technical change.
- Scenario (S4): as in (S3) there is a change in technology in the energy sector, but as in
(S2) it is assumed a constant growth rate of GDP of 1.75 per cent a year from year 2 to year
12. We find out how much GHG emissions grow by sector in the period, t = 7 to 12 of a
constant low growth rate and with technical change.
d) Cost of Pollution model
The model to be used for the calculation of costs is based on the distribution matrix, also
known as the Ghosh matrix (see Dietzenbacher, 1997). This model allows us to determine
the percentage changes in their prices resulting from the effects of a negative externality as
pollution. The individual cost of this bad (as opposed to a good) is estimated as the per-cent
difference between, the vector of gross output, measured in price values x
p
and an estimated
vector x
p
*
we obtained by including the costs of GHG emissions as if they were inputs.
With this model we estimate pollution costs only in Scenario 1, describe above and
considering only data estimated for year 2015 in all the variables.
We start from the vector of gross output in price terms determined by equation:
x
p
= va (I D)
-1
(9)
where: x
p
= gross output vector in price terms; va = value added vector; D = distribution
matrix derived from IOM.
The costs impact equation is defined as:
D
*
= (I + ) D (10)
where: D
*
= increased D matrix; = diagonal matrix with GHG emission coefficient vector
e, in the main diagonal.
The estimation of pollution costs is given by equation:
x
p
*
= va (I D
*
)
-1
(11)
where: x
p
*
= estimated gross output vector (increased by GHG emissions costs) in price
terms.
Pollution relative costs are then determined by:
c
p
= (x
p
*
x
p
) (x
p
)
-1
(12)
where: c
p
= relative differences in costs by industry .
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45
VI. TECHNOLOGY CHANGES AND GHG EMISSIONS REDUCTION: THE MODEL
RESULTS
1. Base line or Business as Usual 2008 to 2020.
The first two scenarios describe two trajectories of Business as Usual, which means that
the economy is working without any change in technology aimed to reduce GHG
emissions. We also assume no changes in aggregate demand, in its components or in its
structure by sector, in the period 2010 to 2020, mainly because there is no particular
expected or unexpected event that might lead us to assume otherwise. We assume,
however, a constant growth of Gross Domestic Product (GDP) or final demand at an annual
rate of 3.5 per cent, for this period (2010-2020) in the first scenario, while in the second we
assume a rate of growth of GDP of 1.7. This latter rate is about the same as the population
rate of growth, so it is in fact an assumption of no per capita growth of the GDP in the
whole period.
We utilised the data of the IOM of Mexico for the year 2008, first to forecast the
vector of final demand from 2010 to 2020. With these estimates we use equation (5) of the
model in section V.3.b, to estimate, in turn, the Value of Gross Output for the period 2008-
2020.
Then we used the GHG emissions coefficient by sector estimated in section IV.2.b
by equation (3), converted from a vector to a diagonal matrix called to calculate by
equation (6) the pollution levels for each year. The results are shown in Table 8 and Graph 1.
The calculations in Table 8 indicate that without any technical change, the tendency
for GHG emissions is to grow in both BAU scenarios and the only reduction we find is in the
year 2009 which is explained by the negative rate of growth of GDP, experienced by the
Mexican economy due to the effects of the world crisis.
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46
Table 8
Year Gg CO eq. Variation Gg CO eq. Variation
% %
2003 562,785.1 562,785.1
2008 742,436.2 5.7 742,436.2 5.7
2009 708,366.9 -4.6 708,366.9 -4.6
2010 745,581.5 5.3 745,581.5 5.3
2011 771,676.8 3.5 758,256.4 1.7
2012 798,685.5 3.5 771,146.7 1.7
2013 826,639.5 3.5 784,256.2 1.7
2014 855,571.9 3.5 797,588.6 1.7
2015 885,516.9 3.5 811,147.6 1.7
2016 916,510.0 3.5 824,937.1 1.7
2017 948,587.8 3.5 838,961.0 1.7
2018 981,788.4 3.5 853,223.3 1.7
2019 1,016,151.0 3.5 867,728.1 1.7
2020 1,051,716.3 3.5 882,479.5 1.7
2020-2003 488,931.2 86.9 319,694.4 56.8
MEXICO ESTIMATED GHG EMISSIONS TRAJECTORIES
Scenario 1 Scenario 2
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2. Introduction of technological changes and reductions of GHG emissions
We first selected the industries on which we were going to assume the introduction of a
technological change. These were the industries we found being the highest pollutant and the
strongest inter-connected to the rest in a measurable consistent way. There is, however, one
industry, Forestry, that is not strategic for its measurable linkages to others, but it is crucial to
be included for its high level of pollution. All these were called the strategic-pollutant sectors
and they were the following six: Forestry, Oil and gas, Mining, Electricity, Iron and Steel and
Truck transportation.
The kind of technical change we assume to take place in these industries is a complete
change in the column vector of inputs of each of these industries. That is to say, these vectors
were extracted from the A (technical coefficient) matrix of the IOM of Mexico and replaced
with different vectors which reflect a most efficient production process, that is less pollutant.
Since we could not get anywhere the information required to do this substitution with
new technologies, we took these vectors from the A matrix from the IOM of Canada, to
construct the A
+
matrix that goes into equations (6) and (11) for estimation.
We have three reasons to use Canadas I-O data as a model to follow: first, the
industry classification system used by Canada for its matrix is quite similar to the one Mexico
is using since the beginning of this decade, for National Income Accounts and for Input-
Output data; second, Canadas economy experienced a substantial GHG reduction in many
industries starting in 2003, with technical changes and a set of policies aimed towards GHG
reductions; third the sectors we are taking from them are those in which the emission
coefficient (GHG per unit of output) is the lowest as compared to Mexicos.
It might be questionable to transfer Canadian industrial technologies of some sectors to
the Mexican economy if we take into account the asymmetries (social, political and in the
degree of development) between the two countries, but there is evidence that this type of
transfers are in practice taking place precisely regarding GHG emissions reducing
technologies (see the study of OECD by Hai, et al., 2009).
Thus, we not only substituted Mexican input vectors by Canadian ones, but substituted
the emissions coefficients of these industries in Mexico by the Canadian ones too, in the
matrix , so it became
+
and it was then used in equation (8) for estimation purposes. The
results for all scenarios are shown in Table 9.
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48
As expected, the value of GHG emissions measured in Giga grams of CO
2
equivalent
for the years 2015 to 2020 with technical change are less of what they would be with no
technical change. The big reduction comes in 2015 when the technical change starts operating.
The reduction is greater when GDP is growing at the rate of 1.7 (S4) than when it is growing
at 3.5 (S3). But total GHG emissions never go down to 2008 levels, not to mention 2003. All
this can be seen more clearly in Graph 2, there is a clear move down of the tendency line in
both scenarios 1 and 2, resulting from the change in technology in only six industries.
Table 9
Year Scenario 1 Scenario 3 % var Scenario 2 Scenario 4 % var
2008 742,436.2 742,436.2 742,436.2 742,436.2
2009 708,366.9 708,366.9 -4.6 708,366.9 708,366.9 -4.6
2010 745,581.5 745,581.5 5.3 745,581.5 745,581.5 5.3
2011 771,676.8 771,676.8 3.5 758,256.4 758,256.4 1.7
2012 798,685.5 798,685.5 3.5 771,146.7 771,146.7 1.7
2013 826,639.5 826,639.5 3.5 784,256.2 784,256.2 1.7
2014 855,571.9 855,571.9 3.5 797,588.6 797,588.6 1.7
2015 885,516.9 826,139.0 -3.4 811,147.6 756,756.5 -5.1
2016 916,510.0 855,053.9 3.5 824,937.1 769,621.3 1.7
2017 948,587.8 884,980.8 3.5 838,961.0 782,704.9 1.7
2018 981,788.4 915,955.1 3.5 853,223.3 796,010.9 1.7
2019 1,016,151.0 948,013.5 3.5 867,728.1 809,543.1 1.7
2020 1,051,716.3 981,194.0 3.5 882,479.5 823,305.3 1.7
2008-2020 309,280.1 238,757.8 32.2 140,043.3 80,869.1 10.9
MEXICO ESTIMATED GHG EMISSIONS WITH TECHNICAL CHANGE
Gg CO2 eq.
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3. Changes in GHG emissions by sector
In Table 10 the estimations of GHG emissions by sector are shown for the years 2008, 2015
and 2020 under the Scenarios 3 and 4, for a selected number of industries which were
identified as strategic and/or high pollutants in the 2008 IOM of Mexico. These industries
represented 88 per cent of total emissions in 2008 and their share was reduced in 2020 under
Scenario 3, by 2 points, because they didnt increase their GHG emissions at the same rate as
all the industries of the economy. In fact there are some that reduce in absolute terms the value
of their GHG emissions for 2020, these are: Oil and Gas, Iron and Steel, Forestry and, Mining.
In all these we are introducing a technical change for GHG reduction. The other two that were
considered for a technological change did not in fact reduce their absolute GHG emissions,
Electricity and Truck transportation. The rest of the industries here selected, except maybe
one, were considered as belonging directly or indirectly to the energy sector, for which we
thought a technological change was necessary for increasing their efficiency and reducing
GHG emissions, but we were unable to obtain the information about new available
technologies for these sectors in a format suitable to be used in an Input-Output model.
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Table 10
No. Industry Base year
2008 2015 2020 Abs. Var. Var. % 2015 2020 Abs. Var. Var. %
9 Electric power generation, transmission, and dist. 176,124.8 183,765.5 218,255.7 42,130.9 23.9 168,332.1 183,135.2 7,010.3 4.0
39 Truck transportation 91,189.0 100,720.8 119,624.7 28,435.7 31.2 92,261.8 100,375.3 9,186.3 10.1
3 Forestry and logging 69,980.2 41,567.8 49,369.5 -20,610.8 -29.5 38,076.7 41,425.2 -28,555.0 -40.8
64 Waste management and remediation services 61,865.8 128,508.0 152,627.2 90,761.4 146.7 117,715.4 128,067.2 66,201.4 107.0
40 Transit and ground passenger transportation 61,552.9 74,129.8 88,043.0 26,490.0 43.0 67,904.1 73,875.5 12,322.6 20.0
10 Water, sewage and natural gas distribution 53,220.4 71,710.1 85,169.1 31,948.7 60.0 65,687.6 71,464.1 18,243.7 34.3
6 Oil and gas extraction 46,672.5 20,278.3 24,084.2 -22,588.2 -48.4 18,575.2 20,208.7 -26,463.8 -56.7
26 Nonmetallic mineral product manufacturing 34,429.1 40,267.6 47,825.2 13,396.1 38.9 36,885.7 40,129.4 5,700.3 16.6
27 Iron and steel mills and manufacturing 30,713.2 6,724.9 7,987.1 -22,726.1 -74.0 6,160.1 6,701.9 -24,011.3 -78.2
36 Air transportation 6,094.3 7,152.6 8,495.1 2,400.8 39.4 6,551.9 7,128.1 1,033.8 17.0
24 Chemical product and preparation manuf. 5,857.3 6,606.2 7,846.0 1,988.7 34.0 6,051.3 6,583.5 726.2 12.4
7 Metal ores and nonmetallic mineral mining 5,146.9 1,670.7 1,984.3 -3,162.6 -61.4 1,530.4 1,665.0 -3,481.9 -67.7
23 Petroleum and coal products manufacturing 4,686.2 5,509.6 6,543.6 1,857.4 39.6 5,046.9 5,490.7 804.4 17.2
37 Rail transportation 2,230.3 3,650.2 4,335.3 2,105.0 94.4 3,343.7 3,637.7 1,407.4 63.1
38 Water transportation 1,848.5 2,477.6 2,942.6 1,094.1 59.2 2,269.5 2,469.1 620.6 33.6
42 Scenic and sightseeing transportation 1,457.6 19,677.3 23,370.4 21,912.8 1,503.4 18,024.7 19,609.8 18,152.2 1,245.4
Selected Industries total 653,069.1 714,416.8 848,503.1 195,433.9 29.9 654,417.2 711,966.3 58,897.2 9.0
All Industries 742,436.2 826,139.0 981,194.0 238,757.8 32.2 756,756.5 823,305.3 80,869.1 10.9
Scenario 3 Scenario 4
ESTIMATES OF GHG EMISSIONS VARIATIONS 2008-2020 BY SECTOR IN SELECTED INDUSTRIES
Gg CO2 eq.
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4. Technical change and output growth
Table 11 and Graph 3 show the estimated trajectories of Total Gross Output per year in
Millions of Pesos, in the four scenarios simulated. Even though this indicator may not totally
adequate to measure economic growth, it reflects the favourable impulse that a technical
change (introduced through a modification in the technical coefficient matrix) produces in the
general tendency of production.
We can see clearly that technical change, interpreted here as a modification in the Input-
Output matrix, when introduced in some strategic sectors, tends to produce important and
beneficial effects like pollution reduction and output growth, simultaneously.
Table 11
Year Scenario 1 Scenario 2 Scenario 3 Scenario 4
2008 20,762,760 20,762,760
2009 19,288,541 19,288,541
2010 20,553,421 20,553,421
2011 21,272,790 20,902,829
2012 22,017,338 21,258,177
2013 22,787,945 21,619,566
2014 23,585,523 21,987,098 23,585,523 21,987,098
2015 24,411,016 22,360,879 25,446,104 23,309,036
2016 25,265,402 22,741,014 26,336,717 23,705,289
2017 26,149,691 23,127,611 27,258,502 24,108,279
2018 27,064,930 23,520,781 28,212,550 24,518,120
2019 28,012,203 23,920,634 29,199,989 24,934,928
2020 28,992,630 24,327,285 30,221,989 25,358,822
ESTIMATED GROSS OUTPUT 2008-2020
Millions of Pesos
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5. The Cost of Pollution model
We calculated the equations (9) to (12), to estimate Gross Output values for the year 2015
with and without imputed pollution costs, assuming a GDP annual growth rate of 3.5 but using
the Price Model. Table 12 shows the resulting estimations for the total of 79 industries and for
each of 28 selected industries.
Table 12 shows the cost that GHG emissions cause. This represents in general 3.7 of
total Gross Output. This increment in the value of Gross Output is purely caused by GHG
emissions. The 28 selected industries concentrate 74 per cent of this change and as a group
they increased their Gross Output in 5 per cent for pollution imputed costs. These 28 industries
are presented in order of importance according to the size of their estimated pollution costs.
All the industries we defined as either strategic or high pollutants are included in this selected
group of 28.
Table 12
No. Industry GO w/o GO with % of
pollution costs pollution costs absolute relative total D
All industries 24,362,871.5 25,265,340.4 902,468.9 3.7 100
Selected indutries 13,211,216.1 13,875,690.3 664,474.2 5.0 73.6
1 14 Food manufacturing 1,455,287.5 1,542,253.8 86,966.3 6.0 9.6
2 11 New nonresidential construction 1,207,596.5 1,289,114.9 81,518.4 6.8 9.0
3 9 Electric power generation, transmission, and distribution 643,046.4 706,605.5 63,559.1 9.9 7.0
4 20 Wood product manufacturing 76,049.9 133,615.2 57,565.3 75.7 6.4
5 32 Transportation equipment manufacturing 1,091,494.6 1,137,716.9 46,222.3 4.2 5.1
6 27 Iron and steel mills and manufacturing 502,877.0 543,776.9 40,899.9 8.1 4.5
7 30 Computer, communications and electronic equipment manuf. 659,355.4 699,818.3 40,462.9 6.1 4.5
8 24 Chemical product and preparation manufacturing 754,649.0 792,056.8 37,407.7 5.0 4.1
9 23 Petroleum and coal products manufacturing 741,095.5 770,849.1 29,753.7 4.0 3.3
10 12 New residential construction 691,826.7 719,150.9 27,324.2 3.9 3.0
11 26 Nonmetallic mineral product manufacturing 298,116.8 316,605.9 18,489.1 6.2 2.0
12 31 Electric lighting equipment and household appliance manuf. 289,513.6 305,891.6 16,378.0 5.7 1.8
13 28 Fabricated metal product manufacturing 220,994.0 237,190.5 16,196.4 7.3 1.8
14 39 Truck transportation 747,893.3 762,262.1 14,368.8 1.9 1.6
15 61 Professional, scientific, and technical services 690,536.3 702,035.7 11,499.4 1.7 1.3
16 6 Oil and gas extraction 1,296,289.4 1,307,209.8 10,920.4 0.8 1.2
17 25 Plastics and rubber products manufacturing 198,280.9 208,288.4 10,007.6 5.0 1.1
18 29 Machinery and equipment manufacturing 178,893.5 188,073.0 9,179.5 5.1 1.0
19 33 Furniture and related product manufacturing 67,698.6 76,463.1 8,764.5 12.9 1.0
20 40 Transit and ground passenger transportation 492,065.4 500,775.4 8,710.0 1.8 1.0
21 21 Pulp, paper, and paperboard mills and paper product manuf. 162,098.0 169,942.7 7,844.7 4.8 0.9
22 1 Crop production 383,207.9 390,291.3 7,083.4 1.8 0.8
23 7 Metal ores and nonmetallic mineral mining 134,114.4 138,792.3 4,677.9 3.5 0.5
24 36 Air transportation 87,263.4 90,483.8 3,220.4 3.7 0.4
25 10 Water, sewage and natural gas distribution 42,321.6 45,334.4 3,012.8 7.1 0.3
26 37 Rail transportation 41,599.2 42,544.1 945.0 2.3 0.1
27 38 Water transportation 26,391.3 27,207.4 816.2 3.1 0.1
28 3 Forestry and logging 30,660.3 31,340.5 680.2 2.2 0.1
ESTIMATED GROSS OUTPUT AND POLLUTION COSTS FOR 2015
Millions of 2008 Pesos
Differences
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VII. SUMMARY, CONCLUSIONS AND POLICY RECOMMENDATIONS
1. Summary and Conclusions
As we established in section V.3: the main purpose of building and developing this EIO
model for the Mexican economy has been to find out under which conditions, would it be
possible for the Mexican Government to fulfil its pledge of reducing the countrys GHG
emissions by 30 per cent below 2002 levels, by 2020.
In this section we summarize the findings of our study aimed to meet that objective,
emphasising their implications for state policy. We also point out the limitations this EIO
model has, their causes and the possibilities for further research with the same approach.
a) Strategic sectors and high pollutant sectors
A very important part of this study is section IV, in which we identify two sets of sectors,
strategic and high pollutants, through the use of the Input-Output matrix of Mexico, the I-O
industrial classification system and Mexicos National Inventory of Greenhouse Gases. All
of these are the most recent and reliable data available. These two sets, in principle
different, are made up of very few industries each, showing that the Mexican economy is
highly concentrated in these areas as it is in many others.
We found that key or strategic industries or sectors were in total only 15 out of the
79 that make up the Input-Output matrix according to the North American Classification
System. With respect to high GHG emissions industries we found in the same classification
that the important group consists of a total of twenty one high pollutants sectors, half of
them belonging to the strategic sector just mentioned. Then, in the intersection of these two
sets we found three groups in order of importance. In the first group we considered four
industries highly strategic for their linkage indexes and highly pollutant for its absolute and
relative GHG emissions: Electricity, Iron and Steel, Truck transportation, and Oil and gas.
In a second group there were two industries: Forestry and Mining. The combination of
these two groups formed a set of industries we define as the strategic-pollutant sector. On a
second level we found five industries associated to transportation services: Air
transportation, Rail transportation, Water transportation, Ground passenger transportation
and Sightseeing transportation. These eleven industries are no doubt the most relevant ones
to deal with for purposes of GHG emissions mitigation.
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b) GHG reduction technologies for strategic and high pollutant sectors
It seemed clear that the industries just defined required attention in the first place for any
GHG mitigation policy related to economic and productive activities. In our opinion as well
as in IPCCs recommendation the only mitigation policy really effective was technological
change.
We found in this respect two alternatives: end-of-the-pipe GHG abatement
technologies or a technical change in the production process and in both cases the
technology had to be sector-specific to be used in the Input-Output matrix. We decided to
look for a technical change in the sectors productive processes, implying a whole change
in the Input-Output vectors of the affected industries or sectors.
Then there was a difficulty in finding at least two alternative technologies per sector
to make the EIO model an optimizing one for choosing the least cost-effective technology
per industry as in B&I (2007). Their EIO model in particular was made up of only thirty
industries and they benefited from another research carried out to make a list of GHG
abatement end-of-the-pipe technologies per sector in the Netherlands by a colleague of
theirs working in the same institute. Our Input-Output matrix consists of 79 industries and
we wanted to make no aggregation for reducing it. Nor did we have the benefit of counting
on such a list of technologies and besides we were not interested in end-of-the-pipe
technologies, so we decided not to build an optimization model but a standard EIO model.
A third decision we made was how to render the EIO model dynamic so as to
estimate the economys annual performance and its GHG emissions through time. We
would have very much liked to copy the dynamic model called DIMITRI built by Idenburg
and Wilting (2004) for the Netherlands, but there is not enough information available in
Mexico regarding capital stock, capacity utilization, investment and depreciation rates per
sector so as to do such a copy for the Mexican economy. Consequently we introduced a
very simple assumption of GDP annual growth for the period 2010-2020 in two possible
scenarios: 3.5 or 1.7 per cent GDP annual growth rate, ceteris paribus, that is to say with no
change in other variables like prices, or demand structure and, of course, no I-O matrix
change except for the technical change. With those assumptions and restrictions, we built
the model in section V.
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Then, for estimating price or costs changes produced by GHG emissions abatement,
we built another model. This one based on an I-O model, different from Leontiefs standard
and developed originally by Ghosh (1958) later by Gazon (1975, 1979) and Auray et al.
(1980) and more recently by Dietzenbacher (1997). Its main feature is that instead of using
the technical coefficient matrix, usually called A (with coefficients normalized by columns)
it uses the distribution or dbouch matrix called D, or B (with coefficients normalized by
rows). It also uses the value added vector for estimation of Gross Output, instead of final
demand vector (see Miller and Blair 2009, Chs.2 and 12).
We then faced the question of how to introduce a technical change in the selected
industries we had already chosen. There was a problem of availability of the technological
information required for these sectors and also of the format required for such information.
Since we couldnt get this information in the adequate form, we made use of a previous
comparison made with Canadas economic industrial structure expressed in its IOM and its
GHG emissions per sector (see section III). We could get the most recent I-O matrix of
Canada, which follows the North American Industry Classification System (NAICS) as
Mexicos IOM does, as well as the most recent National Greenhouse Gas Inventory of
Canada. This way we were able to calculate the GHG emissions coefficients vector per unit
of output (expressed in the same currency for the same year) and compare it to Mexicos.
We then substituted in our GHG emissions coefficients vector, those of Canadas in the
selected industries. We did the same substitution with the Input-Output column vectors of
the same selected industries in matrix A to simulate a change of technology.
c) Results from the model
The models results are very enlightening about the way GHG emissions are generated (as
by products) in the actual economic structure of the Mexican economy. They show that the
industries related to energy production and energy use as a main input are both highly
pollutant by themselves and highly connected to the rest of the economy so as to expand
this bad influence, generating GHG emissions indirectly.
It is clear that unless there is a big technological change in the energy sector and in
those industries related to transportation services, that is, to the vehicles using oil fuels,
there is little chance to meet the objective of reducing GHG emissions levels, even their
rates of growth. This conclusion also affects one of the most important non-energy related
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57
industry which is Forestry. The experience of Canada (see section III) shows that this
industry is strategic in Environmental economics, since it can change from being GHG big
generator to being CO
2
capturer, and reacts very rapidly to a technological change.
We have seen that a technological change aimed to reduce GHG emissions, do reduce
the emissions when this change is applied in strategic and high pollutant sectors. But if the
number of industries having this technical change is increased so as to cover the basic group of
eleven industries we found the most important ones for policy attention, then we could have a
much higher impact in reducing GHG emissions.
In turn, the price model estimated the value of the Gross Output in price terms and
produced an estimate of this GO increased by a set of imputed costs for GHG emissions (as
negative externalities). The differences between these two measurements varied among
industries but, in the average, amounts to 4 per cent of Gross Output.
2. Lessons from the policy debates
The measures originally suggested by IPCC for adaptation and mitigation of Climate Change
were grouped into five categories: market based programs; regulatory measures; voluntary
agreements; scientific research and development (R&D); and infrastructural measures.
Five years later, the 2001 IPCC Report on Mitigation pointed out that, important
considerations in the analysis of climate change mitigation options are, differences in the
distribution of technological, natural and financial resources among and within nations and
regions, and between generations, as well as differences in mitigation costs. And it said
there is also an important issue of equity, namely the extent to which the impacts of climate
change or mitigation policies create or exacerbate inequities both within and across nations
and regions.
With respect to mitigation policies the report recommended that national responses to
climate change can be more effective if deployed as a portfolio of policy instruments to limit
or reduce greenhouse gas emissions[which]... may include emissions-carbon-energy taxes,
tradable or non-tradable permits, provision and/or removal of subsidies, deposit-refund
systems, technology or performance standards, energy mix requirements, product bans,
voluntary agreements, government spending and investment, and support for research and
development. Some of the reports findings on this matter are that Energy efficiency
standards and performance regulations are widely used, and may be effective in many
Low Carbon Strategy for Mexico: I-O Model. Final Report
58
countries, and sometimes precede market based instruments. Voluntary agreements have been
used more frequently, sometimes preceding the introduction of more stringent measures
(IPCC, 2001).
In these reports the need for state intervention arises also from the existence of market
imperfections in each and every economy in the world. The OECD emphasises that putting a
price on GHG emissions, through price mechanisms, has the limitation that they do not
address the full range of market imperfections that prevent emissions to be cut at least cost,
such as information problems (Duval, 2008).
The OECD finds also that empirical analysis indicates that the most important
determinant of innovation in the area of renewable energy technologies is general innovative
capacity. However, it says, public policy makes a difference. Public R&D expenditures on
renewable energies induce innovation, as do targeted measures such as renewable energy
certificates and feed-in tariffs.
Finally, another issue that calls for state action is the issue of equity, namely the
extent to which the impacts of climate change or mitigation policies create or exacerbate
inequities both within and across nations and regions. This implies the need for the
application of state policy measures aiming to prevent or to compensate any inequities that
may result from either climate change impacts or mitigation policies, between sectors or
population groups within a country, and of internationally agreed regulations in the same
direction for inequities between countries.
Despite all recommendations, market oriented policies prevailed in most countries and
they did help, but little, in solving the GHG emissions problem. Nicholas Stern pointed out in
his Review in 2006, after eighteen years of the IPCC foundation, that Climate Change was
the greatest and widest-ranging market failure ever seen (Stern, 2006). Stern also called
for a major change (as opposed to a marginal one) in GHG reductions.
We can interpret what Stern meant by market failure. In the first place this is a
situation in which free market yields an outcome which is not Pareto efficient. The reasons for
that may be, as IPCC and OECD pointed out the existence of market imperfections in most
countries; that we are dealing with a negative externality that cannot be internalized by firms
without government intervention, according to Hepburns opinion; that pollution is a public
good, or rather a public bad, and therefore its price cannot be determined by free market
Low Carbon Strategy for Mexico: I-O Model. Final Report
59
forces; that it is a case of imperfect information as the OECD pointed out (Duval, 2008); or
finally as Hepburn based on Stiglitz considers, that this a market failure due to principal-agent
problems (Hepburn, 2010: Stiglitz, 1991). For all these reasons, there seems to be no doubt
that Climate Change is a great market failure. But there is also another cause of market failure
that applies in this case, the question of equity, emphasized by IPCC and OECD, whether or
not this cause is considered a valid one in modern welfare economics.
Therefore, this great market failure calls for state intervention, even as a second best
policy, that is, with full awareness that it is not possible to have a Pareto efficient solution, in
modern welfare economics terms. And this state intervention has to be as large as the size of
the problem to be solved, in order to produce the major change that is required, as Stern stated.
3. Policy recommendations derived from this study
From what we have learned of the policy debate regarding environmental issues and from
studying Mexicos economic reality and its policy institutions, we think that the federal
government must take immediate and decisive actions for establishing strong regulations in
the use of fossil fuels in industrial processes in order to reduce GHG emissions in specific
sectors we have identified in this study. These regulations must be equal to the highest
standards applied in other countries, and eventually lead to a technological change aimed to
make their productive processes more efficient in terms of the use of energy and of fossil fuel
combustion so as to reduce directly and indirectly GHG emissions. The industries that require
the most attention are essentially in three groups: (a) the energy sector: electricity, mining, oil,
gas, oil products and chemical products; (b) all transportation related industries, from
transportation production, to all services of freight and passengers transportation using fossil
fuels and (c) Forestry and all industries related to it.
Our recommendations, following from the present study, in no way disqualify as a
policy instrument the use of carbon permits, marketable or not, or other instruments that have
been useful in other countries developed or underdeveloped to reduce carbon emissions. Quite
the contrary, the only difficulty we find in this regard is that it is unlikely that a market of
carbon permits will work with the efficacy and efficiency needed by the economy to reduce
GHG emissions. It is indispensable the direct action of the state.
Low Carbon Strategy for Mexico: I-O Model. Final Report
60
a) Technology and Public expenditure
We think that, given the Mexican political and institutional arrangement today, the instruments
to be used for these purposes should be state instruments like taxes, legal pecuniary sanctions,
subsidies, etc. But they must include also public investment since the energy producing firms
are state owned. They desperately need equipment and plants renewal and maintenance. The
state must find ways, directly or through the OECD to buy and adapt GHG reducing
technologies for these sectors, which may be already in operation in other countries. The
required financing for these projects may come also from international sources such as the
World Bank.
Public expenditures are needed as well for Scientific Research and Development
(R&D) in the energy sector to induce technological innovations or adaptations of existing
efficient technologies. Technological change is not only a desired objective but a necessity of
an economy engaged in making more efficient its productive processes in general and in
particular to save energy and protect the environment while at the same time reaching an
adequate rate of growth, that is, sustainable growth.
b) Reforestation
Besides energy, the other one very important sector needing attention in Mexico is Forestry. A
serious policy of reforestation must be implemented, utilising whatever resources the state has
at hand. Forestry is a strategic sector of the economy, since it is a high GHG emissions
generator but can be transformed into a GHG capturer as in the Canadian experience.
4. Further research
In the first place the price model needs to be fully developed so as to calculate the impact on
sectors prices caused by technical change. Secondly, it would be interesting to make a
comparison with some General Equilibrium model developed for Mexico. Thinking this way
it could be possible to extend our own I-O analysis building a Social Account Matrix for
Mexico so as to evaluate social impacts of GHG emissions, on the one hand, and the structure
of demand on the other, and changes in demand induced by technical change.
Another important issue is to find a way to use the results of this I-O model to feed a
Macro econometric model.
But may be the most important point here is to find ways to incorporate new
technologies in all strategic and high pollutant sectors of the Mexican economy in order to
Low Carbon Strategy for Mexico: I-O Model. Final Report
61
simulate a strong technical change in production and distribution activities to find out in a
more realistic way whether it is possible for Mexico to grow and at the same time reduce GHG
emissions and to locate the bottlenecks. The study made by the Instituto Mexicano de la
Competitividad (IMCO) on technological change, might be a good starting point if we can
translate properly each of the technologies the study proposes to use, into the Input-Output
coefficients format. There are other sources that could help to fill the gap, although it may be
expensive to get the information required from them.
Finally, having enough time we even may find useful to build some sort of fixed
capital matrix of the Mexican economy in order to produce forecasts of GHG emissions and
GDP growth for 2020 under various scenarios, based on different new investment and
capacity utilization assumptions including of course technical change in key sectors. We know
that the information for this is not available but we could work something out to build a proxy.
Low Carbon Strategy for Mexico: I-O Model. Final Report
62
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