6 Air Emissions and Displacement of Production
A Case Study for Italy, 1995–2007
Introduction
In a previous study by the same authors, the general factors behind the trends of Italian production-related air emissions relevant to three environmental themes, greenhouse gases (GHG), acidifying substances and tropospheric ozone precursors, were analysed for the period 1992–2006 by means of decomposition analysis (Femia and Marra Campanale, 2010). Hybrid environmental and economic accounts (National Accounting Matrix integrated with Environmental Accounts, NAMEA-type tables), including data on energy use by activity, were used to break down the yearly emission variations into changes in four determinants: level of economic activity, structure of production, energy use per output unit (energy intensity of output) and emissions per unit of energy input (emission intensity of energy use).
For all three environmental themes, results showed that total emission changes had been mainly held low by virtue of the two components representing the environmental efficiency of industries. With regard to the structure of production, it had a generally favourable impact on total emission variation.
Two questions arise from this analysis. Is a reduction in the emission intensity of energy use mainly due to a better use of the same fuels or has a shift towards less polluting fuels taken place? Is the reduction in the energy intensity of output a consequence of technological and organizational improvements or is it due to the fact that more energy-intensive goods are imported rather than produced by domestic industries?
In this chapter, we address the second question. It is a well-known fact that more and more of Italian industry products are actually being manufactured abroad, with only the final stages being performed in Italy; this implies that the output is obtained without using the necessary energy in the ‘producing’ industry which in reality only buys, as intermediate inputs, products that are almost finished from abroad and re- sells them after little transformation. This displacement of production may be an important explanatory factor for the observed environmental Kuznets curve (EKC) for air emissions; its importance depends directly on the pollution-intensiveness of the displaced industries. To the extent that this explanation holds, the EKC pattern does not deliver very significant information on the environmental effects of economic growth as regards the global dimension. In this chapter, we explore this issue with reference to the most global of environmental issues, climate change. We do this by quantifying and comparing: (a) the total GHG emissions that would have been generated by Italian producers if all products needed to satisfy the final demand of Italians as well as foreign demand for Italian products had been produced in Italy; (b) the changes in these hypothetical emissions that can be ascribed to genuine technological changes and to changes in the level and composition by industry of the various types of final demand (private and public consumption, gross capital formation and exports) respectively; (c) the parts of these hypothetical emissions ascribable to intermediate and final imports respectively; (d) the effects of the shift between the sources, whether domestic or foreign, of final and intermediate products on the import-driven parts of the hypothetical emissions.
We apply a structural decomposition analysis (SDA) to an environmentally extended input–output (EE-IO) model based on NAMEA1 and on supply-anduse tables made publicly available by the Italian National Institute of Statistics (ISTAT, 2010, 2011), supplemented by additional information on some industries that are not significantly present in Italy.
Methodological Framework
Perspectives for Addressing Environmental Pressures and Policy Consequences
Environmental pressures can be analysed following two approaches based on the Input–Output Framework of the European System of Accounts (Eurostat, 2008). In the ‘responsibility of the producer’ or ‘direct flow’ approach, the pressures are those of ‘standard’ industries, i.e. industries defined as the sets of all statistical units that carry out the same (main) economic activity. The statistical data on the environmental pressures by industry made available by European National Statistical Offices (ISTAT for Italy) through the NAMEA framework respond to this straightforward approach. On the other hand, according to the ‘responsibility of the final user’ or ‘total flow’ approach, the environmental pressures refer to the ‘vertically integrated’ industries (Pasinetti, 1973), i.e. to the sets of all production activities that are directly and indirectly needed to obtain final products. In this case, for each industry, the focus is only on the whole production chain of its final products. This is a broad process involving the entire production system. Therefore, although a vertically integrated industry takes its name from its final products, it is in reality very different from the ‘standard’ industry of the same name since it is a collection of extremely diverse activities. Each vertically integrated activity is completely independent of the others and contains all that is needed from extraction to sale to the final user (Femia and Panfili, 2005). Its emissions are calculated by cumulating the emissions of all the parts of the ‘standard industries’ that contribute to the final result, from the extraction of the necessary natural resources up to the delivery of the final product. Indeed, data responding to the ‘total flow’ approach may only be a mathematical artefact, i.e. they are not observable data but the result of a calculation based on a NAMEA-like description of the direct pressures which is therefore a prerequisite for the calculation of ‘total flows’ through the environmentally extended Leontievian model, along with the description of the inter-industry structure provided by the supply-and-use and input–output tables. This study takes the latter approach.
The choice between the two perspectives mainly depends on the driving force, production or final use, one wishes to take as an explicit policy target. Under the ‘direct flow’ approach, the level and composition of the final uses is not the possible aim of policies, whereas the environmental efficiency of individual (standard) industries is at the centre of attention. On the contrary, under the ‘total flow’ approach, the question is how the level and composition of the final uses should change if we want to achieve a given change in environmental pressures.
This choice is sometimes seen as a judgement on who is responsible for environmental pressures, whether it is the producers or the users of the final products. Clearly, the purchase of a final good activates the pressures of the whole production chain so that the choice of whether to buy a final product may be laden with an ethical value with respect to the emissions caused. However, this is not a necessary feature of the approach, at least as long as the total environmental pressures stemming from national production are merely reclassified (the total amount being the same at the domestic macro, economy-wide, level) according to their functional value. However, the ‘total flow’ approach allows us to go beyond domestic boundaries since the application of its logic can be easily extended to the production of traded products in order to focus on all the environmental pressures caused by final purchases, including the pressures directly stemming from foreign production systems. In this case, the ‘vertically integrated’ industries will constitute the pressures ‘embodied’ in the imported products or the pressures avoided. The study of the relationship between the direct pressures of the Italian economy and those avoided due to trade is the specific aim of this study.
In recent years, this question has been posed in connection with global climate negotiations.2 In this case, the focus is on GHG since for these pressures on the global environment, the possibility of shifting their generation to other countries by relying on international trade and outsourcing may weaken the environmental justice of the agreements based on direct responsibility only (Peters and Hertwich, 2008). The emphasis on air emission measures responding to the direct flow perspective (i.e. only measuring domestic emissions) might induce the countries who should reduce their emissions to offshore/outsource their production to countries where GHG targets do not apply. This suits industrialized countries whose final and intermediate demand heavily drives the production-related emissions in export-oriented economies such as China.3
The international displacement of industrial production calls attention to the shift of high polluting industries to countries with lower environmental standards. This elusive phenomenon by which developed countries achieve their environmental targets more easily than they would otherwise may even result in a negative overall effect. Therefore, addressing the issue of ‘responsibility’ means considering the fact that some of the commodities produced by a country are consumed abroad as well as the fact that some of its final use of products depends on production, and hence emissions, abroad, and accounting for the emissions concerns the whole production chain, no matter where goods and services are produced.
Offshoring and Displacement
The internationalization of economic activities is an essential feature of globalization of the economy. As Costa and Ferri (2007) write, ‘several theoretical and empirical studies on the domestic effects of offshoring of production follow the political and social concern that relocating part of business abroad depletes employment and worsens performance at home’. This phenomenon is usually measured by taking account of the share of imports in the intermediate inputs of the domestic production process.
This chapter deals with the importance of delocalization as a possible driver of improvements in Italian energy efficiency. We investigate to what extent efficiency improvement is explained by the displacement of Italian industrial production, made operational as a composition effect, as an increase in the share of imports in intermediate and final demand. Then, the notion of displacement we adopt captures the shift abroad of energy-intensive industries and stages of production which improves the composition by industry as well as the energy efficiency of domestic activities, although it does not improve the structure of final demand.
EE-IO Analysis of the Total GHG Emissions ‘Embodied’ in Italian Industries’ Final Products and in Imports
The Model
The EE-IO model calculates the total GHG emissions associated with Italian economic activities, including those avoided due to international trade, by analysing the direct and indirect emissions required to produce the final products of Italian industries (including those activated by final demand through imported intermediate inputs) as well as the products imported for final uses.4
For the purposes of this calculation, we integrate the Italian IO tables ad hoc in order to supplement the information on the cost structure of some industries (extraction of coal, oil and natural gas, non-energy minerals). Indeed, the information on these industries provided by the Italian IO tables is not representative since only some parts of these industries are present in Italy. We therefore add three virtual industries to the matrices, drawing from Eurostat datasets from other European countries which represent the missing arts of these industries.
Domestic emissions (dE) may be written as total emissions that would have occurred if all production steps had been carried out domestically (E) minus emission avoided due to (intermediate and final) imports (mE):5
In the following formulae we use r for the vector of GHG emission intensities of output by industry, dA for the matrix of domestic production direct coefficients, mA for the matrix of intermediate import direct coefficients, 
for the direct coefficient matrix of total intermediate inputs, dY for the matrix of final uses of domestic products by delivering industry and by category of final demand, mY for the matrix of final uses of imported products by delivering industry and by category of final demand and 
for the matrix of total final uses by delivering industry and by category of final demand.
The global-oriented IO model which calculates the total emissions activated world-wide by the final demand for Italian and imported products is:
the actual emissions of the Italian production system, seen from the perspective of activation by final demand for domestically produced goods and services, are reallocated to the vertically integrated industries according to the domestic flows of intermediate inputs:
the emissions avoided due to final imports are calculated as:
the emissions activated by final demand through intermediate imports are calculated as a residual:
Results
Results for GHG emissions of the Italian economic activities, based on elaborations on matrices at current prices, are shown in Table 6.1. Various indicators have been calculated which reflect different meanings of the Italian economy.
Table 6.1 Italian GHG Emissions Ascribable to Final Demand, 1995–2007 (million tonnes)
Between 1995 and 2007, the actual GHG emissions of Italian economic activities do not fluctuate much and at the end of the period are only 15.1 million tonnes (MT) higher (3.4 per cent). However, the total emissions calculated for total final demand (whose composition by kind of final demand is discussed below) grow much more (73.9 MT; 11.9 per cent); this is due to the dynamics of foreign trade: the emissions avoided due to imports increase by almost 58.8 MT (32.2 per cent). In particular, GHG emissions avoided due to intermediate imports activated by final demand are 41.3 MT (28.5 per cent) higher at the end of the period while those avoided due to final imports grow by 17.6 MT, a striking 45.9 per cent.
The emissions avoided due to imports as a whole amount to about 30 per cent of the total emissions from 1995 to 2003; their share increases up to 35 per cent in 2007, as if the increase of the emissions activated by exports in the same period (2003–2007, from 27 per cent to 31 per cent) were transferred abroad through imports. Indeed, the imports that enter as intermediate inputs in the Italian production processes form 75 per cent of total emissions avoided due to imports in 2003 and 77 per cent in 2007. The final (domestic and foreign) demand for Italian products activates on average in the period 93 per cent of total emissions; these emissions increase by 56.3 MT (9.6 per cent) from 1995 to 2007.
With regard to the composition by kind of final demand of the estimated total emissions, those activated by private and public consumption account on average in the period for 56 per cent, but decrease from 57 per cent in 2003 to 52 per cent in 2007; gross capital formation accounts for 16 per cent without remarkable changes whereas the remaining average 28 per cent, increasing up to 31 per cent in 2007, is ascribable to exports.
Table 6.1 also reports the balance of the emissions ‘embodied’ in trade, here defined as the GHG emissions virtually imported via the export of goods and services minus the GHG emissions virtually exported via the import of good and services (avoided emissions). A negative trend of the Italian balance is shown throughout the whole period; this demonstrates that the global emissions caused by the Italian production and consumption patterns are higher than actual emissions of Italian resident producers.
Although these results are affected by a price effect on emission estimates whose direction is unpredictable (inflation entails higher nominal values for final demand, but also lower direct emission intensities), they show that imports played an important role in keeping actual GHG emissions low.
Results by vertically integrated industry in 2007 and their 1995–2007 changes are shown in Table 6.26 (more detailed data by industry are available on request). Over the period, ‘Manufacturing’ industries (NACE divisions 15 to 37) are responsible for most of Italian actual emissions (42.4 per cent on average). In 2007, the actual emissions of this vertically integrated sector account for 185.1 MT and they decrease by 1.8 per cent from 1995. The total emissions of these industries increase up to 353.4 MT (and have grown by 12 per cent since 1995) because of the importance for ‘Manufacturing’ both of imports on the supply side (168.4 MT in 2007 and +32.6 per cent since 1995) and exports on the demand side (183.9 MT in 2007 and +26.8 per cent since 1995). Indeed, these economic activities account on average over the period for almost 70 per cent of emissions ascribable to final imports and activated through intermediate imports and for 83.5 per cent of total emissions ascribable to exports. The analysis by kind of final demand of the results for the vertically integrated ‘Manufacturing’ activities shows that more than half of the 2007 emissions is triggered by foreign demand (183.9 MT and has increased by 26.8 per cent since 1995) and 48 per cent by domestic final uses (169.6 MT, not changing much since 1995). As far as the emissions ascribable to total imports and exports are concerned, crucial relevance among these industries must be assigned to the NACE sub-sections DA ‘Manufacture of food products; beverages and tobacco’, DB ‘Manufacture of textiles and textile products’, DG ‘Manufacture of chemicals, chemical products and man-made fibres’, DJ ‘Manufacture of basic metals and fabricated metal products’, DK ‘Manufacture of machinery and equipment n.e.c.’, DL ‘Manufacture of electrical and optical equipment’ and DM ‘Manufacture of transport equipment’.
Table 6.2 Italian GHG Emissions by Vertically Integrated Industry in 2007 and 1995–2007 Changes (million tonnes and percentages)
Notes
* In this line 1995 values are shown instead of percentage changes.
Legend
Description of the NACE codes: (01–05) ‘Agriculture, forestry and fishing’; (10–14) ‘Mining and extraction’; (15–37) ‘Manufacturing’; (40–41) ‘Electricity, gas and water’; (45) ‘Construction’; (50–55) ‘Trade’; (60–63) ‘Transport’; (64–95) ‘Services’.
Attention should also be drawn to the service activities (NACE 50 to 95) and ‘Construction’ – respectively 30.6 per cent and 7.4 per cent of Italian total emissions on average during the period – which are characterized by a higher share of emissions activated through intermediate imports than the share of emissions ascribable to final demand for imported products. These vertically integrated activities show different characteristics on the demand side: services are more connected to final private and public consumption and, though to a lesser extent, to exports; ‘Construction’ emissions are basically and obviously related to gross capital formation.
The agricultural sector (NACE 01–05) data shows that the emissions avoided due to imports are mainly ascribable to final demand for imported products (5 MT in 2007, +20.7 per cent from 1995). Emissions avoided due to this sector’s intermediate imports are quite low (0.9 MT); it can therefore be concluded that the emissions virtually exported by selling Italian agricultural products abroad are indeed actual emissions of Italian producers and not the result of a transfer of virtually exported emissions.
The Structural Decomposition Analysis of total GHG Emissions ‘Embodied’ in Italian Industries’ Final Products and Imports
The Model
The decomposition approach builds on the general extension of the Dietzenbacher and Los (1998) method suggested by Seibel (2003) which is equally suited for use both with the IO model and with sector-level data.
If we also consider the composition of total final demand by industry, equation (2) can be written as:
where the vector 
describes the composition of total final demand by delivering industry and y′ is the vector of total final uses by delivering industry. In order to break down the change in emissions in the period (t) – (t + 1), the basic idea of the decomposition analysis is to split e′ in the changes, ceteris paribus, of the four components identified in equation (6): ‘emission intensity’ and the ‘Leontief’ components, which basically are two technological factors; the ‘composition of final demand’ by delivering industry (one euro spent on final product i activates a different quantity of emissions than one euro spent on final product j); the level of total final demand which is the most significant driving force in emission growth. We calculated the changes in the total emissions ascribable to each of the above-mentioned determinants on a year-by-year basis for the period 1999–2007 (due to the availability of supply-and-use tables evaluated at constant prices of the previous year). We did this by subtracting the emissions calculated for the first year using monetary data at current prices from the emissions calculated for the second year by using data at the previous year’s prices. These changes were then cumulated in order to reconstruct the evolution of the total change and its components in the whole period.
Results
Figure 6.1 shows the results of this exercise. The change in total emissions in the period 1999–2007, thus calculated, was of about 46 MT, or 8 per cent of the initial value. This increase is exclusively due to the ‘total final demand’ component, which alone would have implied 101 MT more emissions, reflecting the increasing level of economic activities during the period. The other components were either on the whole insignificant (‘input structure’ or ‘Leontief’ component, and ‘composition of final demand’) or counterbalanced this effect (‘direct emission intensity’ which would have entailed a 55.5 MT reduction in GHG emissions).
Figure 6.1 Cumulative changes between 1999 and 2007 in total emissions ascribable to Italian production and final uses, broken down by effect (million tonnes).
The Structural Decomposition Analysis of Total GHG Emissions Avoided Due to Final and Intermediate Imports
With regard to emissions triggered by imported commodities 
, we test the hypothesis that significant avoidance of emissions is due to incremental displacement of production by means of two separate SDA, one for final and one for intermediate imports.
Final Imports: The Model
In order to evaluate this ‘displacement’ hypothesis for final imports for each year and industry, we take the previous year’s imports share on total final demand for the products of that industry as reference so that if this share does not change, nothing is ascribed to the displacement component, even though the imports may have changed in absolute terms. We therefore use the following model in which the SDA follows the methodology introduced in the previous section:
where 
denotes the displacement component: this is the vector of the imported final demand’s share of total final demand by the delivering industry; y′ represents the vector of total final uses by the delivering industry. The ‘emission intensity’ and the ‘Leontief’ components were already identified in equation (6).
Intermediate Imports: The Model
With regard to GHG emissions activated by final demand through intermediate imports, the formula used for the SDA is the one already specified in equation (5). This expression comprises the matrix dA whose elements are7 
. To identify the ‘displacement’ component, we now aim to single out, in the change 
, how much is due to the technical factor aij and how much is due to the shift abroad of the source of the intermediate inputs supplied by industry i to industry j.
Let g be the percentage change of aij in the period (t) – (t + 1) and let us calculate the value 
that would have at time (t + 1) if it changed in the same way as aij:
The difference between this coefficient and the actual value 
can be conceptualized as the effect of displacement of supply sources in favour of foreign activities. On this basis, we can now study the year-by-year changes in 
for testing the effect on the avoided emissions of the displacement of intermediate production. The change in the period (t) – (t + 1) will be:
where we define mex as the vector of emissions activated by final demand through intermediate imports, calculated using tables at current prices, by delivering industry, 
as the vector of emissions activated through intermediate imports, valued at previous year prices, by delivering industry, as the vector of emissions that would have been produced if the domestic share of intermediate inputs had remained unchanged, i.e. assuming g as the percentage change of and 
as the vector of emissions 
with dy valued at current prices.
The change in the emissions activated through intermediate imports is broken down into four components. The first element in equation (9) shows the change due to the change in prices, the second, the displacement effect, and the last two components explain the change due to other factors which are not linked to delocalization, namely domestic final demand and technology.
Here we are interested in the second component of the above identity which shows the change in total emissions that would have occurred if the domestic intermediate input matrix had remained unchanged (and therefore also the intermediate import matrix).
Results: the Role of Displacement from Decomposition Analyses
Table 6.3 summarizes the results of the two decomposition analyses. It can be noted that actual domestic GHG emissions from production would have grown much more than they did (38.1 MT rather than 15.3 MT) if there had been no displacement of production. Indeed, the change in composition of the sources of supply was such that only around one-fourth of the increase of the emissions avoided due to imports (30.8 MT) was due to changes affecting the total size of the emissions of the vertically integrated industries (8 MT due to the total final demand, intermediate inputs needs and emission intensity of output) whereas the remaining three-fourths may be ascribed to a displacement effect.
Table 6.3 Effect of Displacement of Production on GHG Emissions: Italy, 1999–2007 (million tonnes)
Figure 6.2 shows how the two components of imports contributed to the overall change in the period by reporting the cumulated effect of production displacement. It may be noted that there was no increase in the total, i.e. no displacement effect, from 2000 to 2001, whereas a definite trend emerges for the whole subsequent period in which two different sub-periods may be identified, one (2001–2004) where displacement grows due to final imports and another (2004–2007) where it grows due to intermediate imports.
Figure 6.2 Cumulated effect of production displacement through intermediate and final imports, 1999–2007 (million tonnes).
Figure 6.3 shows the role of displacement at the level of the vertically integrated industries from 1999 to 2007 for the 14 ‘Manufacturing’ NACE sub-sections and four other activities whose results are worth taking into account.
Figure 6.3 Displacement effect on emissions by type of import and by vertically integrated industry, 1999–2007 (million tonnes).
Notes
Description of the NACE codes: (01) ‘Agriculture, hunting and related service activities’; (DA) ‘Manufacture of food products; beverages and tobacco’; (DB) ‘Manufacture of textiles and textile products’; (DC) ‘Manufacture of leather and leather products’; (DD) ‘Manufacture of wood and wood products’; (DE) ‘Manufacture of pulp, paper and paper products; publishing and printing’; (DF) ‘Manufacture of coke, refined petroleum products and nuclear fuel’; (DG) ‘Manufacture of chemicals, chemical products and man-made fibres’; (DH) ‘Manufacture of rubber and plastic products’; (DI) ‘Manufacture of other non-metallic mineral products’; (DJ) ‘Manufacture of basic metals and fabricated metal products’; (DK) ‘Manufacture of machinery and equipment n.e.c.’; (DL) ‘Manufacture of electrical and optical equipment; (DM) ‘Manufacture of transport equipment’; (DN) ‘Manufacturing n.e.c.’; (F) ‘Construction’; (G and H) ‘Wholesale and retail trade’ and ‘Hotels and restaurants’; (60) ‘Land transport’.
We find most of these vertically integrated industries in the first quadrant of the diagram which indicates a shift abroad both of final demand and intermediate consumption. In particular, it is important to note that the latter are activated by the part of final demand which was not displaced. Within this quadrant, ‘Manufacture of chemicals, chemical products and man-made fibres’ (DG), ‘Manufacture of textiles and textile products’ (DB), ‘Wholesale and retail trade’ and ‘Hotels and restaurants’ (G and H) and, though to a lesser extent, ‘Manufacture of rubber and plastic products’ (DH) and ‘Manufacture of pulp, paper and paper products; publishing and printing’ (DE) show a preponderance in displacing the intermediate steps of production processes; on the contrary, the displacement of final imports prevails in ‘Manufacture of transport equipment’ (DM).
A sort of replacement occurs both for agricultural and land transport activities. With regard to the fourth quadrant, ‘Manufacture of machinery and equipment n.e.c.’ (DK) and ‘Manufacture of basic metals and fabricated metal products’ (DJ) only show a shift in intermediate inputs.
Conclusions
Although not huge in relative terms (‘only’ 5.2 per cent of the 1999 level of domestic GHG emissions from production), there was a significant displacement of the Italian GHG emissions towards the rest of the world, stemming mainly from the growing shares of imports in the final demand for products of the manufacturing industries and in the intermediate demand of these industries. This means that emissions avoided due to imports grew more rapidly than total final demand due to a shift in composition of supply of final and intermediate products towards the rest of the world. This indicates the importance of also analysing the total environmental flows of economies and going beyond territorial estimations of environmental pressures. If they really care about the global climate and, more generally, the global environment, policy-makers should be aware that, although hidden under some foreign carpet, this dirt may be known, measured and considered a target in global and national policies.
Notes
1 Tudini and Vetrella, in Chapter 1, provide a comprehensive picture of NAMEA-type accounts.
2 It also makes sense to pose the question at domestic level to address ‘Sustainable Consumption and Production’ policies, for example.
3 Ahmad writes that of the 40 per cent increase in CO2 emissions between 1990 and 2007, only one-quarter comes from OECD economies and over half from China, whose emissions trebled over the period (‘Measuring carbon dioxide emissions embodied in consumption’: presentation delivered by Ahmad at the conference The Structure of Economic Systems through Input–Output Applications: Europe and International Perspectives, Accademia Nazionale dei Lincei, Rome, 21–22 October 2010).
4 The carbon footprint (CF) literature usually excludes exports from the embodied emissions. We believe this option makes sense to avoid double counting when comparing different countries’ CF, which is not the purpose of this study. We are interested in Italian production and total GHG activation by final demand irrespective of its source; this is why we also account for goods and services actually produced in Italy and used abroad afterwards.
5 Matrices are in bold capital letters, vectors in bold lower-case letters and scalars in italicized lower-case letters. Vectors are rows by definition so that column vectors are obtained by transposition, indicated by a prime. A diagonal matrix with the elements of any vector on its main diagonal and all other entries equal to zero is denoted by angle brackets < >.
6 For analysis purposes, industries are aggregated into eight macro sectors. Note that, in order to show more homogeneous activities as for environmental pressures, the NACE section ‘Transport’ (60–63) does not constitute the ‘Post and telecommunications’ division which is included in the aggregation ‘Services’ (64–95).
7 The index i is the delivering industry and j the receiving industry.
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