Economic Analysis Series No.154
An Econometric Approach to Environmental Problems

November, 1997
Kazuhiro Ueta (Senior Visiting Fellow)
Kanji Yoshioka (Visiting Fellow)
Yoshihisa Inada (Visiting Fellow)
Kiyoshi Fujikawa (Visiting Fellow)
Akira Yokoyama (Visiting Fellow)
Mikio Suga
Tetsuo Saito
Minoru Ono
Wataru Kawashima
Masakazu Yamagishi
Toshiyuki Suzuki
Hiroki Nakayama
Koju Murota
Naoki Adachi

The full text is written in Japanese.


I.  An Analysis of China's Economic Development and Environmental Problem
   -An Empirical Study Using a Macro Econometric Model Linked with an Input-Output Model-

Some developing countries suffer from the so-called three E tri-lemma on Economy, Energy and Environment. The key to solve this problem is swift energy savings that can reduce air pollution, including green gas emissions, and also enable the sustainable development of the world economy. Needless to say, technological cooperation among developed and developing countries have played an important role concerning energy savings or environmental conservation. This report attempts to examine the efficiency of technological cooperation using a macro econometric model based on the newest available data, with special reference to Japan and China.

First, we reviewed the difference of the sources of changes in the industrial structure observed in Japan and China by applying a DPG (Deviation of Proportional Growth) model to the IO tables of these countries. The DPG model defines a measure of the degree of change in output composition and breaks it down into factors including final demand ones like consumption, investment, exports, etc, and a technological factor representing the efficiency of intermediate demand. Concerning overtime changes of the industry structure of these countries, consumption and export demands were the leading factors that boosted Japan's growth sectors in the case of Japan, while the growth of intermediate demands was modest especially in the 1970s. In other words, technological improvements could reduce demands for intermediate inputs in Japan. However, the most important is the increase of intermediate demands as a boosting factor during the Chinese rapid growth after the start of its "Open Door" policy. In other words, Chinese economic growth has been resource using or environment exploiting. In addition, regarding the sources of the structural gap between Japan and China, it is remarkable that Chinese intermediate inputs are used inefficiently compared with Japan. These observations indicate that technological transfer from Japan to China is a promising measure to reduce energy consumption in China.

Second, we carried out a static simulation study to quantify the effect of technological transfers from Japan to China taking the reduction of carbon dioxide (CO2) missions as an indicator. It is done through modifying Chinese input coefficients in the IO table, which depict the technological characters of the economy. We confirmed that the most extreme case, in which the whole set of the Chinese input coefficients were replaced by those of Japan, would half China's CO2 emissions. This result suggests that technological transfers really work.

Third, we constructed a mid-term macro econometric model to forecast the Chinese economy. This model is mainly based on the supply side, but partially takes demand side multiplier effects into account since the SNA based data are recently available. Another main feature is that the industry sector is divided "state owned" and "non-state owned" firms in order to clarify the difference of their attitude concerning production or employment. The results of the forecast indicate that China will keep high economic growth of 8-10% per year for the next ten years. China will thus be, at the beginning of the next century, a huge CO2 emitting country compared to the United States in the year 1990 if no measures are taken for energy efficiency improvement. And, to make matters worse, CO2 emissions will increase more if the final demand structure gets modernized like developed countries.

II.  Applications of Input-Output Approach in Environmental Analysis
    -A Study of Scenario Leontief Inverse-

How much CO2 is emitted through the production and consumption of goods&services? To answer this question we can calculate it precisely by using the open input-output model. And there is another question. How much emission of CO2 will be reduced when we change the industrial structure of our country? It is not adequate to use the open input-output model to answer this question. In the open input-output model, it is supposed that an activity produces only one product, and that inputs are not substitutable. In practice, many activities produce more than two products, including scraps and wastes. Many types of energy are used in an activity, and some of them are substitutable. This is the reason the open input-output model is not adequate for this case. We then made a model named the 'scehario Leontief' model. In this model, we need not assume that an activity produces one output, and that inputs are not substitutable. The primary purpose of this paper is to explain our 'scenario Leontief' model.

About 1.0-1.5 billion tons of CO2 are emitted annually from the economic activities in our country. (The emission of CO2 is measured by the weight of CO2, not by the weight of carbon). 25 percent of them are emitted from the electric power industry, 10 percent from the steel industry, and 7 percent from the cement industry. These three industries are the top three highest in CO2 emission rank. It is important to improve emissions of CO2 from these three industries, all of which mysteriously depend on each other. First, the remaining heat and waste gas from the cement and steel industries can be used in electric power generation. Second, effective uses of ash from the coal-fired power generation plant and slag from the blast furnace can reduce the emission of CO2 in the cement industry. The emission of CO2 in the cement industry mainly comes from using limestone. In the cement producing process, calcium carbonate (CaCO3), the main component of limestone, decomposes into calcium oxide (CaO) and CO2. We can reduce the amount of limestone by using ash and slag in the cement industry, and at the same time reduce the emission of CO2 coming from limestone. Third, recycling of scrap iron will increase electric power demand in the electric furnace to melt scrap iron. The electric power, steel, cement industries use byproducts and scrap from each other. We applied the 'scenario Leontief' model to explain the interdependence among these three industries. We simulated the model, supposing the utilization rates of slag, ash, scrap were to be changed from the benchmark, and calculated how much emission of CO2 and consumption of the primary energy would be reduced. The second purpose of our paper is to show the application of the 'scenario Leontief' model.

In 1990, 59% of slag and 6% of ash were effectively utilized in the cement industry, along with 31% of the steel made from scrap (other steel was made from cast iron). We found that if slag is fully utilized, 0.71% of the emission of CO2 from Japan will be reduced, and 0.20% of the consumption of primary energy will be also reduced. If ash is fully utilized, 0.07% of the emission of CO2 will be reduced, and 0.02% of the consumption of primary energy will be also reduced. If 51% of steel is made from scrap, 1.95% of the emission of CO2 will be reduced, and 2.28% of the consumption of primary energy will be also reduced. If scrap and ash are fully utilized and at the same time 51% of steel is made from scrap, 2.43% of the emission of CO2 will be reduced, and 2.42% of the consumption of primary energy will be also reduced. It is very interesting that the combined effect is smaller than the total of each effect.

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