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Energy Economics 23 2001 179᎐190
Methodological issues in cross-countryrregion decomposition of
energy and environment indicators
F.Q. Zhang, B.W. Ang
U Department of Industrial and Systems Engineering, National Uni
¨
ersity of Singapore, 10 Kent Ridge Crescent, Singapore 119260, Singapore
Abstract
A recent development in energy and environment decomposition analysis is the applica- tion of the technique to cross-countryrregion comparisons. Cross-countryrregion decompo-
sition gives rise to several problems that do not normally occur in chronological decomposi- tion of changes in a specific country. These include large variations in explanatory factors in
the data, the measure of economic output and structural comparability. We examine these problems using energy-related CO emission data of three world regions. It is concluded
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that the conventional decomposition methods are not effective in cross-countryrregion studies as they tend to leave a large residual. Instead, perfect decomposition methods should
be adopted. The choice of economic output measure can affect decomposition results greatly and the impacts vary from one decomposition method to another. 䊚 2001 Elsevier
Science B.V. All rights reserved.
JEL classifications: C50; Q41
Keywords: Decomposition methodology; CO emissions; Cross-country comparisons
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1. Introduction
The past two decades have seen many studies dealing with decomposition of changes in energy and environmental indicators, such as aggregate energy con-
sumptionrintensity and aggregate CO emissionsrintensity. Almost all these stud-
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U
Corresponding author. Tel.: q65-8742203; fax: q65-7771434. Ž
. E-mail address:
iseangbwnus.edu.sg B.W. Ang . 0140-9883r01r - see front matter 䊚 2001 Elsevier Science B.V. All rights reserved.
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PII: S 0 1 4 0 - 9 8 8 3 0 0 0 0 0 6 9 - 4
F.Q. Zhang, B.W. Ang r Energy Economics 23 2001 179᎐190 180
ies dealt with decomposition of changes in an aggregate over time in a specific country or region. As far as we know, only three and fairly recent studies dealt with
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decomposition across country or region. In the study by Proops et al. 1993 , cross-country decomposition of CO
emissions in Germany and the UK was
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conducted. Chung 1998 investigated differences in energy-related CO emissions
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in industry in China, Japan and South Korea. Both studies adopted the input᎐ output structural decomposition approach. More recently, inter-region decomposi-
tion of energy-related CO emissions in three world regions using the index
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decomposition approach was reported in Ang and Zhang 1999 . The main empha- sis of these three studies is primarily empirical. Of interest to the authors are the
identification of factors and the relative contributions of these factors to the differences in CO emissions between the countries or regions studied.
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Cross-country decomposition studies allow analysts and decision-makers to have a better understanding of the underlying causes of variation in an aggregate
between countries. There are, however, some specific problems in cross-country decomposition that do not normally arise in decomposition of changes of an
aggregate over time in a country. These problems have so far not been addressed in detail in the context of decomposition studies. Cross-country decomposition is
often characterized by large variations in explanatory factors, such as GDP and fuel shares in energy consumption, which arise from inherent differences between
the countries compared. In such a situation, application of the conventional decomposition methods could lead to a large residual which makes result interpre-
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tation very difficult. In the study by Chung 1998 , for instance, the residual amounts to 18 of the difference in CO emissions between China and South
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Korea. To overcome such a problem, some recently proposed perfect decomposi- tion methods may be used. Application of such methods does not leave a residual.
An important variable in cross-country analysis is economic size, which is often given by GDP. Two common ways of measuring GDP are the exchange-rate-
converted GDP and the purchasing-power-adjusted GDP. A country’s economic size, especially that of a developing country, can be significantly affected by the
choice made. There have been studies on the impacts of switching from one measure to another on cross-country energy-GDP correlation but the impacts on
the results given by cross-country decomposition have so far not been examined in any study.
In this paper, we examine the above and some related technical issues using energy-related CO emission data of three world regions. Two popular conventio-
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nal decomposition methods, i.e. Laspeyres method and arithmetic mean weight Divisia method, and two recently proposed perfect decomposition methods, i.e.
refined Laspeyres method and logarithmic mean weight Divisia method, are applied to two data sets, one based on exchange-rate-converted GDP and the other
purchasing-power-adjusted GDP. We first describe these decomposition methods and the data. We then discuss the above-mentioned issues using the decomposition
results obtained. Some other technical issues, including a comparison between the two perfect decomposition methods and structural comparability in cross-country
F.Q. Zhang, B.W. Ang r Energy Economics 23 2001 179᎐190 181
decomposition, are also examined. An explanation of the difference between the decomposition results given by the two perfect decomposition methods is included
in Appendix A.
2. Decomposition methodology
