Measuring Energy Linkages with the Hypothetical Extraction Method: An application to Spain Ana-Isabel Guerra Ana-Isabel Guerra Ferran Sancho Universitat Autònoma de Barcelona Universitat Autònoma de Barcelona (Spain) (Spain)

Key points of this Analysis Goal: Stressing empirically the relevance of Energy Linkages for the effectiveness of energy efficiency policies Goal: Stressing empirically the relevance of Energy Linkages for the effectiveness of energy efficiency policies Relevant in the actual context: Energy Efficiency policies one of the main concerns of the EU Energy Policy Relevant in the actual context: Energy Efficiency policies one of the main concerns of the EU Energy Policy Methodology: within the Input-Output framework “Key sectors analysis” using the Hypothetical Extraction Method. (HEM thereafter) Methodology: within the Input-Output framework “Key sectors analysis” using the Hypothetical Extraction Method. (HEM thereafter) Novel Contribution to the existing literature: We have Generalised the HEM to measure Sectors’ “keyness” in terms of stronger Energy Linkages for Energy Efficiency policies. Novel Contribution to the existing literature: We have Generalised the HEM to measure Sectors’ “keyness” in terms of stronger Energy Linkages for Energy Efficiency policies. Data: SIOC-2004 for Spain and “Satellite” Environmental Data: SIOC-2004 for Spain and “Satellite” Environmental

I.I. Introduction: Why Energy Efficiency Policies are so relevant?  First Goal: Reduce negative externalities: Energy efficiency improvements seek reducing the link between Energy use, Economic activity and Environmental degradation. Energy efficiency improvements seek reducing the link between Energy use, Economic activity and Environmental degradation.  Derived Positive Effects: Income effects: Income effects: Efficiency improvements increase productivity and thus, favors economic growth. Efficiency improvements increase productivity and thus, favors economic growth. Trade Balance: Trade Balance: Production is less costly Increases competiveness Production is less costly Increases competiveness Less Energy inputs are needed Energy imports decreases Less Energy inputs are needed Energy imports decreases  Derived Negative Effects: Potential Energy Savings might be totally or partially lost due to the decline in the actual price of Energy (Rebound effects, Khazzoom (1980))

I.II. Introduction: What determines Energy Efficiency Policy effectiveness? Specific Characteristics of the sector receiving the energy efficiency policy inflow: Specific Characteristics of the sector receiving the energy efficiency policy inflow:  Degree of energy intensiveness: Transport, Manufacturing, Energy and Construction sectors.  However this energy intensiveness provides incomplete information for those economies in which there are markets’ interdependencies Tighter sectors’ interdependencies generate stronger economy-wide impacts and this is pertinent for economic policy effectiveness. (Hirschman, 1958) Tighter sectors’ interdependencies generate stronger economy-wide impacts and this is pertinent for economic policy effectiveness. (Hirschman, 1958) Then, Sectors’ role in the existing network of market interactions should be measured: Identification of “key sectors” Then, Sectors’ role in the existing network of market interactions should be measured: Identification of “key sectors”

I.III. Introduction: How to identify “key sectors”?  Input-output framework the most appropriate for this task: Sectors’ keyness identified using the information contained in the Leontief inverse because it reflects direct and indirect sectors’ linkages: forward and backward linkages Sectors’ keyness identified using the information contained in the Leontief inverse because it reflects direct and indirect sectors’ linkages: forward and backward linkages  Two approaches: Classical Multiplier Method: Sectors’ keyness is measured through out the effect of hypothetical positive demand shocks over output levels, i.e. output gains. Classical Multiplier Method: Sectors’ keyness is measured through out the effect of hypothetical positive demand shocks over output levels, i.e. output gains. Hypothetical Extraction Method: Sectors’ keyness is measured through out the negative effect of an hypothetical cessation of external sectors’ activities, i.e. output losses Hypothetical Extraction Method: Sectors’ keyness is measured through out the negative effect of an hypothetical cessation of external sectors’ activities, i.e. output losses

II.I. Our Approach: the HEM and energy efficiency policy effectiveness Goal (recalling): Identifying “key sectors” for a higher effectiveness in the design of energy efficiency policies. Goal (recalling): Identifying “key sectors” for a higher effectiveness in the design of energy efficiency policies. Among the two methodologies ( the Classical method and the HEM), the HEM appears to be the most appropriate tool in this case. Among the two methodologies ( the Classical method and the HEM), the HEM appears to be the most appropriate tool in this case. Why? Why? the HEM can be seen as an extreme case of energy efficiency policies, this is in fact the advantage of a linear model: “efficiency improvements are so high that energy external linkages completely disappeared”. the HEM can be seen as an extreme case of energy efficiency policies, this is in fact the advantage of a linear model: “efficiency improvements are so high that energy external linkages completely disappeared”.

II.II. Our Approach: About the HEM It is assumed that there are two blocks in the economy, E, -E. It is assumed that there are two blocks in the economy, E, -E. On Analysing the “keyness” of these blocks, A -E,E On Analysing the “keyness” of these blocks, A -E,E =A E,-E =0 Then: Then: For a constant f, compute the difference between (2) and (3), thus, evaluate changes in output levels. For a constant f, compute the difference between (2) and (3), thus, evaluate changes in output levels.

II.III. Our Approach: Data and Methodology Data: SIOC-2004 for Spain and “Satellite” Environmental Accounts Data: SIOC-2004 for Spain and “Satellite” Environmental Accounts The economy is partitioned into two large production blocks: Energy sectors and Non-Energy sectors The economy is partitioned into two large production blocks: Energy sectors and Non-Energy sectors When using the HEM two types of extractions are applied: When using the HEM two types of extractions are applied:  Sequential Extraction of Energy sectors and quantified sectors’ output losses (Energy and Non-Energy)  Sequential Extraction of Non-Energy sectors and quantified Energy sectors’ output losses

III.I. Methodology: First type of Extraction When energy sectors are sequentially extracted: When energy sectors are sequentially extracted:  Sectors’ Higher Output losses indicates higher energy efficiency sensitivity.  This information is helpful to identify the origin of the ‘perverse’ effects of energy efficiency gains: - Channels trough out the decline of the effective price of energy is transmitted generating “Rebound Effects” - Channels trough out the decline of the effective price of energy is transmitted generating “Rebound Effects” -Higher sensitivity in terms of quantities can be interpreted as a higher sensitivity in terms of energy input costs. However depending on elasticity of substitution values. -Higher sensitivity in terms of quantities can be interpreted as a higher sensitivity in terms of energy input costs. However depending on elasticity of substitution values.

III.II. Methodology: Second type of Extraction When Non-Energy sectors are sequentially extracted: When Non-Energy sectors are sequentially extracted:  Higher Output losses in Energy Sectors indicates a larger amount of energy inputs to fulfill they external market relationships (direct and indirect).  This measure turns out to be a more complete approximation to sectors’ energy intensity than the conventional energy input-output ratio.  Input-output ratio only controls for the direct energy input requirements

IV.I. Results: First type of Extraction Table I. Relative Output Losses for all sectors under the Hypothetical Extraction of Energy Sectors. Spanish I/O Data Production Units 2. Extraction of Anthracite, Coal, Lignite and Peat 3. Extraction of Crude and Natural Gas 5. Coke, Refinery and Nuclear fuel; 6. Production and distribution of electricity 7. Production and distribution of Gas 1.Primary Sector 0,01580,0070,1020,2630, Extraction of Anthracite, Coal, Lignite and Peat 98,592 0,0311,056 84,6610, Extraction of Crude, Natural Gas, Uranium and Thorium 0,16299,69776,77214,46819,74 4. Other Extractive Industries 0,0700,01420,3570,6260, Coke, Refinery and Nuclear fuels 0,1730,039855,27410,4250, Production and Distribution of Electricity 0,3710,0331,01371,9020, Production and Distribution of Gas 0,1340,0890,78230,26173,881

IV.I. Results: First type of Extraction Table II. Percentage Emission Losses by Air Pollutant under the Hypothetical Extraction of Energy Sectors. Spanish I/O Data Air Pollutant 2. Extraction of Anthracite, Coal, Lignite and Peat 3. Extraction of Crude & Natural Gas 5. Coke, Refinery & Nuclear fuel 6. Production and distribution of Electricity 7. Production and distribution of Gas SOx 0,6240,1626,24345,48110,047 NOx 0,3000,0863,09417,4695,261 NMVOC 0,0360,0160,587 0,9721,364 CH 4 2,7760,0490,4053,6520,360 CO 0,0940,0251,8833,0334,043 NH 3 0,0180,0070,1610,2740,133 CO 2 0,4630,1334,880 23,8986,850 SF 6 0,0500,0210,2620,7405,700 NO 2 0,0590,0170,5401,9120,804 PM10 1,0560,0552,539 10,8563,786 PFC 0,1570,0140,3260,9065,400 HFC 0,0960,0180,4420,4543,000 OVERALL REDUCTION IN EMISSION LEVELS OF AIR POLLUTANTS 0,4720,1304,79723,5516,753

IV.II. Results: Second type of Extraction Table III. Relative output losses of Energy Sectors under the Hypothetical Extraction of Non-Energy Sectors. Spanish I/O Data Production Units Energy Intensity Measures 2. Extraction of Anthracite, Coal, Lignite and Peat 3. Extraction of Crude & Natural Gas 5. Coke, Refinery &Nuclear fuel 6. Production and distribution of Electricity 7. Production and distribution of Gas Average impact Energy Sectors 10. Other Industrial Sectors & Recycling HEM 7,6592,3961,8404,3354,6034,166 I/O Ratio 0,0010,0000,0440,1761, Chemistry Industry, Rubber and Plastic Industry HEM 3,92010,9412,0725,3207,7017,990 I/O Ratio 0,0170,0160,5163,5061, Manufacturing Industries HEM 5,41013,15110,85922,02722,48214,785 I/O Ratio 0,0530,0020,8360,2391, Construction HEM 28,0266,9456,1248,5517,66311,461 I/O Ratio 0,0100,0370,5890,2030, Commercial & Transport Activities HEM 10,19521,39521,70317,26714,70917,053 I/O Ratio 0,0020,1350,0402,4281,462

IV.II. Results: Second type of Extraction Table IV. Percentage Emission Losses by Air Pollutant under the Hypothetical Extraction of Non-Energy Sectors. Spanish I/O Data Non-Energy Sector s Overall % reductions in emissions levels % Explained by Energy Sectors % Explained by Non- Energy Sectors 1. Primary Sector 5,4821,554, Other Extractive Industries 2,2850,3941, Water Sector 0,4530,1920, Food Beverage, Tobacco, Textile and Leather Products 9,3393,3715, Other Industrial Sectors & Recycling 5,0361,6573, Chemistry Industry, Rubber and Plastic Industry 5,6072,9162, Manufacturing Industries 20,5818,50912, Construction 10,0383,3836, Commercial & Transport Activities 15,4097,4887, Market Services 13,1246,8746, Market R & D 0,3600,2110, Not Market Servicies & Public administration 8,5775,3683,208

Conclusions: This analysis has performed a double simulation exercise using an adaptation of the HEM applied to energy and non-energy blocks with Spanish data: This analysis has performed a double simulation exercise using an adaptation of the HEM applied to energy and non-energy blocks with Spanish data: First type of extraction: Production and Distribution of Electricity turns to be a “key sector” for energy efficiency policies and for the possible “Rebound effects”. First type of extraction: Production and Distribution of Electricity turns to be a “key sector” for energy efficiency policies and for the possible “Rebound effects”. Second type of extraction: Should the indirect consumption of energy be controlled for, Commercial and Transport activities together with the Manufacturing industries turn out to be the more energy intensive. Second type of extraction: Should the indirect consumption of energy be controlled for, Commercial and Transport activities together with the Manufacturing industries turn out to be the more energy intensive. This novel reformulation of the HEM provides useful information for maximising economy-wide impacts of energy efficiency policies is concerned. This novel reformulation of the HEM provides useful information for maximising economy-wide impacts of energy efficiency policies is concerned.

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