g20 low carbon competitiveness index: 2012 update · g20 low carbon competitiveness index: 2012...

G20 low carbon competitiveness index: 2012 update

Report prepared for The Climate Institute

Final Report

March 2012

2 G20 low carbon competitiveness index: 2012 update

An appropriate citation for this report is:

Vivid Economics, G20 low carbon competitiveness index: 2012 update, report prepared for The Climate

Institute, March 2012


Executive Summary Most countries improved their low carbon competitiveness score

between 2005 and 2008

The agreement made at COP 17 in Durban for all countries to commit to a legally binding framework for

emissions reductions provides the backdrop for a review of how each is positioned to be competitive in a

low-carbon future. The way in which each nation adapts to a carbon constrained world will, to an extent,

determine its future economic competitiveness and ability to create prosperity for its residents.

In 2009, The Climate Institute released the G20 low carbon competitiveness report which quantitatively

ranked the nineteen G20 countries in terms of their low carbon competitiveness (Vivid Economics, 2009).1

The measures in that report complement traditional measurements of competitiveness, which alone were

largely failing to assess the consequences of how countries adapt to the opportunities and costs of moving to

a carbon constrained world. The measures are selected based on their correlation with low carbon

competitiveness as indicated by statistical techniques and represent a unique approach to assessing low

carbon competitiveness. This report updates the low carbon competitiveness index, and fills this gap with

comparative, data-driven analysis of the progress countries are making.

The low carbon competitiveness index measures the current capacity of each country to be competitive and

to generate material prosperity for its residents in a low carbon world, based upon each country’s current

policies and indicators.

Generally speaking, countries that have both high levels of GDP per capita and have acknowledged the need

to orient their economies towards low carbon growth come towards the top of the low carbon

competitiveness index. The index is charted in Figure 1. By contrast, countries towards the bottom of the

index are Australia and non-Annex I nations that are heavily dependent upon carbon intensive production for

income.

Highlights from the report:

In order, France, Japan, the UK, South Korea and Germany top the LCCI. These countries are

followed by Canada, China, the USA, Italy and Brazil.

Since the release of the first index in 2009,2 France has retained its position at the top of the index,

while Japan and the UK have overtaken South Korea to take second and third places. Using updated

1 There are nineteen country members of the G20 plus the EU. The performance of the EU as a whole is not considered in this report.

2 The report released in 2009 was based upon 2005 data, while this 2012 report is based upon 2008 data.


data, most countries attain a ranking one or two places higher or lower in the updated index;

although Australia, ranked 16th, is one of those countries which retains the same ranking. Russia,

South Africa and India also see no change in their rankings.

The LCCI has also been calculated for 1995 and 2000 as well as for 2005 and 2008. The overall

pattern is that those countries in the top half are improving their performance over time, while many

of those in the lower half are stagnating. Australia is the only country which has a score in 2008

lower than that in 1995; although other countries such as Canada, South Africa, the UK and India

also show little improvement. Some of the biggest improvements since 1995 are seen in China,

South Korea and Mexico.

The LCCI is built from indicators grouped into three categories – early preparation, sectoral

composition and future prosperity.

– Early preparation variables include indicators reflecting the steps that countries have

already taken to move towards a low carbon economy. Countries which take early action

will have higher standards of living in a low carbon future. The carbon intensity of

electricity and investment in sustainable energy businesses are examples of indicators in this

category.

The USA has the highest score for early preparation, followed by France and then Germany.

The USA has, by some distance, the highest levels of investment in sustainable new energy

on its stock market, and also has levels of industrial energy efficiency which are above

average and electricity distribution losses which are below average.

Australia ranks slightly below average in this category due to a higher carbon intensity of

electricity generation, while performing mid-table on the other measures.

– Sectoral composition variables reflect the fact that economies which have a more emissions

intensive structure – for example, through exporting carbon-intensive goods and having

carbon-intensive electricity and transport sectors – will face a greater challenge in remaining

competitive in a carbon constrained world.

France, South Korea and China have the best scores on sectoral composition. France has the

highest level of clean energy production, the least emissions-intensive exports and relatively

low levels of car ownership, while South Korea has the highest share of high technology

exports. China has low emissions per capita from the transport sector, the highest rate of

reforestation, and the second highest share of high technology exports.

Australia is amongst those countries facing the biggest challenge from its sectoral

composition in remaining competitive in a low carbon future. Australia has the lowest level

of overall clean energy production, the second highest number of cars per capita, and

relatively high deforestation and emissions per capita from the transport sector.


– Future prosperity indicators contribute towards prosperity today and will also be important

in a carbon-constrained future. A country can achieve a higher score in the future prosperity

category of the LCCI if, for example, it has high educational expenditures and investment in

physical capital and has low depletion of energy, forest and mineral resources and high

existing GDP per capita.

Japan, Germany and the USA have the highest scores in this category. Japan has low

population growth, low depletion of natural capital and the highest level of GDP per capita,

but relatively low spending on education.

Australia ranks in the middle for this category with higher than average spending on

education, levels of GDP per capita and ease of starting up a business, but lower than

average investment in physical capital and a relatively high rate of natural capital

depreciation. The deterioration in Australia’s future prosperity score is due to declining

investment in education and higher population growth.

The score for Australia does not include the impact of the Clean Energy Futures package, as the measures

contained therein have largely not yet come into force. Australia’s position – ranking 16th out of the 19 G20

countries - remains the same in the updated index, and Australia has fallen backwards on a number of

indicators for 2008 when compared to the 2005 data in the original report.


Contents

Executive Summary ............................................................................................... 3

1 Introduction .......................................................................................... 9

2 The results of the updated LCCI ...................................................... 14

Appendix: constructing the LCCI ........................................................................ 33

Appendix: data preparation .................................................................................. 35

References ............................................................................................................ 38


List of tables

Table 1. A total of nineteen variables are included in the index ....................... 12

Table 2. The future prosperity category has the highest weight in the index ... 13

Table 3. Each country has improved performance in some areas and

deteriorated in others .......................................................................... 32

List of figures

Figure 1. Twelve of the nineteen countries have moved position in the index

from 2005 to 2008 ............................................................................... 15

Figure 2. Most countries improved their score from 2005 to 2008 .................... 16

Figure 3. The UK stagnates over time while South Korea and Germany have

caught up. ............................................................................................ 17

Figure 4. With the exception of Indonesia and Saudi Arabia, most of the

improvement is in the upper half of the index. ................................... 18

Figure 5. Indonesia, Mexico, China and Korea show the largest improvement in

the Low Carbon Competitiveness Index from 1995 to 2008, while

Australia, South Africa, India and the UK show the smallest

improvement ....................................................................................... 19

Figure 6. Most countries’ scores improve from 1995 to 2008, with Australia

being the notable exception. ............................................................... 20

Figure 7. From 1995 until 2008, Australia is the only country not to have

improved its index score ..................................................................... 21

Figure 8. The USA, France and Germany have the highest score for early

preparation in 2008. ............................................................................ 23

Figure 9. France, South Korea and China have the best sectoral composition

scores .................................................................................................. 25

Figure 10. Japan, Germany and the USA have the highest future prosperity

scores. ................................................................................................. 27


Figure 11. Australia’s score worsens over time while South Africa stagnates .... 29

Figure 12. While all countries improve in their early preparation score, the

evidence is mixed for the sectoral composition and future prosperity

score. ................................................................................................... 30

Figure 13. There have been some large changes within each of the three

categories, even in cases where the overall score is relatively constant

over time ............................................................................................. 31

Figure 14. Data revisions mean that the rankings for 2005 are slightly different

from those in the original report ......................................................... 36

Figure 15. Data revisions resulted in slight changes to the 2005 index ............... 37


1 Introduction This report presents an update of the original 2009

report

Section Contents:

1.1 Description and motivation for the index ............................................. 10

Rankings of countries in the low carbon competitiveness index change over

time

The low carbon competitiveness index combines multiple components into a

single performance index based upon statistical modelling. This update report

uses an identical methodology and variable definitions to the original report in

2009, and not only calculates the index based upon the most recent data, but also

backcasts the index to 1995 and 2000 to allow changes over time to be identified.

The original report states:

‘the definition of low carbon competitiveness

for a country is taken to be the ability of a

country to generate material prosperity to its

residents in a carbon constrained world’


1.1 Description and motivation for the index

Low carbon competitiveness will deliver a higher standard of living

in a carbon-constrained world

1.1.1 Low carbon competitiveness

A carbon3 constrained future will alter the economic position of every country, producing winners and losers.

The differential impact of these changes will mean that, along with changes in production costs and

consumer demands, global patterns of trade will shift. There is widespread recognition that those countries

which are relatively less emissions intensive, or move first to reduce emissions, will gain a relative

advantage as the world reduces its greenhouse gas emissions (Commonwealth of Australia, 2011; NRTEE,

2010). In sum, countries’ competitiveness will change. Although competitiveness is a complicated concept

and, moreover, ideas of competitiveness themselves also need to adapt to a low carbon world, countries

which are prepared for these shifts are likely to be better placed to secure the well-being of their residents.

Low carbon competitiveness has been assessed by a number of organisations, some of which produce

quantitative measures and others which are more qualitative in nature. Examples of exercises which

benchmark low-carbon performance include the Climate Competitiveness Index (AccountAbility, 2010),

OECD indicators for green growth (OECD, 2011), the Counting the cost of carbon report of

PricewaterhouseCoopers (PricewaterhouseCoopers, 2011), the Measuring up report of the Canadian NRTEE

(NRTEE, 2010) and the precursor to this report, the G20 low carbon competitiveness report (Vivid

Economics, 2009). The contribution of this report is to enhance accountability by tracking the changes in

countries’ rankings over time. The methodology developed in the 2009 report, which was calculated on the

basis of data from 2005, has been updated and re-calculated on the basis of 2008 data. In addition, historical

information has been collected which has enabled the index to be calculated for 1995 and 2000. It is

therefore now possible to consider how countries are moving over time, as well as their absolute ranking at

the present moment.

1.1.2 The definition of the low carbon competitiveness index (LCCI)

Full details of the methodology are presented in the 2009 release of this report, and a summary is also

included in an appendix to this report.

The definition of low carbon competitiveness for a country is taken to be the ability of a country to generate

material prosperity (proxied by economic output) to its residents in a carbon constrained world. Countries

with higher levels of carbon productivity; that is, GDP per unit of emissions, will be better-placed to provide

material prosperity to their residents in a carbon constrained future. Accordingly, the LCCI considers a large

number of variables and then weights them according to their association with carbon productivity. This

approach is unique as it uses statistical analysis to assess and rank the variables with respect to their

influence on low carbon competitiveness. The variables used to construct the index are summarised in Table

3 Throughout the document, except where stated, references to carbon (dioxide) relate to emissions of the six greenhouse gases

identified by the IPCC, excluding those from the land use change and forestry sector, expressed on a CO2e basis.


1, and the weightings applied are presented in Table 2. In analysing this index, it is important to recognise

that there are a number of reasonable choices of which variables to include and the weights to give them, and

that there is no deterministic manner in which to make those choices. This is a widely recognised limitation

of all such index-creation exercises. It is partly in recognition of this limitation that it is useful to consider

changes over time as well as absolute rankings. Counterbalancing this limitation, composite indices such as

the LCCI have a number of advantages, such as being able to combine different measures into a single index,

and pinpointing the reasons for changes in headline rankings.

1.1.3 Data sources for the updated index

Data for 2005 has been revised for some variables and this has been taken into account for this project. The

result of this is a slight change in the rankings for 2005 over the previous version. For example, the IEA data

(International Energy Agency, 2010) for non-OECD countries has been revised and the World Bank (World

Bank, 2011) revised the fixed capital formation and the amount of renewable energy in total energy

production. Lastly, the source for the price of diesel fuel has been changed in order to have consistent data

for the current past versions of the index; and, for GDP per capita and population growth the estimates from

the World Bank instead of the Penn World Tables have been used.

In order to recast the index for 2000 and 1995, the same sources as for the 2005 and 2008 indices have been

used. Most of the data is available for 2000 and 1995 and where data was missing for certain variables,

assumptions have been made to enable construction of an index which is directionally accurate.4

For the current 2008 index most data are from 2008, with only two exceptions. Firstly, the change in forest

cover rates is only reported on a 5 year basis and has been interpolated to 2008 levels based upon 2000 and

2005 forest cover. Secondly, the size of road transport, i.e. the motor vehicles per 1,000 people, is only

available for 2007 for some countries. As this variable is not prone to large changes within one year, 2007

data has been used for these countries as a proxy for their 2008 levels.

4 For example, the cost of business start up procedures in 1995 has been approximated with its 2000 value.


Table 1. A total of nineteen variables are included in the index

Variable Definition Source Is higher better?

Category

Transport sector energy consumption per capita

‘000 tonnes of oil equivalent (toe) per capita

International Energy Agency (IEA) No Sectoral Composition

Deforestation rate Percentage of total forest cover

World Development Indicators (WDI) and UN Global Forest Resource Assessment (FRA)

No Sectoral composition

Share of high technology exports

Percentage of total exports WDI Yes Sectoral Composition

Size of road transport sector

Cars per 1000 people WDI No Sectoral Composition

Balance of emissions embodied in trade

Percentage of total emissions from production

Peters et al. (2011) No Sectoral Composition

Air freight Million tonne-kilometres WDI No Sectoral Composition

Clean energy production Percentage of total energy use

IEA Yes Sectoral Composition

Efficiency of oil refining Net energy input into oil refineries per unit of output (‘000 toe)

IEA No Early Preparation

New sustainable energy investment

$US equivalent listed on the local stock exchange

Bloomberg New Energy Finance Yes Early Preparation

Electricity distribution losses

Percentage of total electricity generated

IEA No Early Preparation

Annual growth in greenhouse gas emissions

Change in emissions (%) World Resource Institute (WRI) No Early Preparation

Price of diesel fuel $US/litre GTZ Yes Early Preparation

Carbon intensity of electricity

CO2 per kWh WRI No Early Preparation

Human capital Education expenditure as % of GNI

WDI Yes Future Prosperity

Physical capital Rate of fixed capital formation as % of GNI

WDI Yes Future Prosperity

Natural capital Depreciation as a % of GNI WDI No Future Prosperity

Population growth Percentage WDI No Future Prosperity

GDP per capita 2000 $US per person WDI Yes Future Prosperity

Cost of business start-up procedures

Percentage of GNI per capita WDI No Future Prosperity

Source: Vivid Economics, World Development Report, International Energy Agency, World Resources Institute, Bloomberg New

Energy Finance, GTZ, UN FRA and Peters et al. (2011)


Table 2. The future prosperity category has the highest weight in the index

Category Category weight Number of variables in

category

Weight of each variable in

overall index

Early preparation 0.194 6 0.032

Sectoral Composition 0.349 7 0.050

Future Prosperity 0.457 6 0.076

Note: The derivation of the category weights is described in Vivid Economics (2009)

Source: Vivid Economics


2 The results of the updated LCCI

Almost all countries improved their score between

2005 and 2008

Section Contents:

2.1 Rankings in the LCCI over time ........................................................... 15

2.2 Rakings in the LCCI by sub-component .............................................. 22

2.3 Country analysis ................................................................................... 28

France was ranked first using 2005 data, and remains at the top with the

2008 data; Australia retains 16th

position

In this section the low carbon competitiveness index is calculated on the basis of

data from 1995, 2000, 2005 and 2008. The performance of each country in 2008

is compared and the reasons for high and low performance outlined. Changes in

both relative and absolute position over time are also identified.

‘those countries in the top half are

improving their performance over time,

while many of those in the lower half are

stagnating’


2.1 Rankings in the LCCI over time

Many countries have different rankings in 2008 and in 2005

2.1.1 France and Japan are ranked first and second in the 2008 LCCI

The rankings from the LCCI calculated with data from 2005 and 2008 are presented in Figure 1. Most

countries move one or two places up or down in the revised index, although Australia, ranked 16th, is one of

those countries which retains the same ranking.

Figure 1. Twelve of the nineteen countries have moved position in the index from 2005 to 2008

Note: The country codes used are the ISO3 standards


France retains its position at the top of the index, while Japan and the UK overtake South Korea to take

second and third places. Canada and the USA also see some improvement and each overtakes one other

country to achieve rankings of 6th and 8

th respectively. Turkey improves significantly and moves up two

places from 13th to 11

th, overtaking Mexico and Argentina. The countries ranked 14

th to 17

th – Russia, South

Africa, Australia and India – see no change in their rankings. At the bottom of the index both Saudi Arabia

Country code

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and Indonesia improve, but Indonesia does so faster and so overtakes to leave Saudi Arabia as ranked last out

of the G20 countries in the 2008 LCCI.

Figure 1 presents the ranking in the index, but it is also informative to examine the way the scores of

countries have moved up or down over time. The absolute values of the scores from 2005 and 2008 are

presented in Figure 2. This figure reveals, for example, that South Korea is ranked lower not because its

score declined, but because those of the UK and, especially, Japan increased. France, already at the top in

2005, extended its lead even further and was one of the countries to achieve the largest increase in its score.

Relatively big improvements were also recorded by Turkey, Indonesia and Saudi Arabia, with smaller

improvements by Canada and the USA.

Figure 2. Most countries improved their score from 2005 to 2008


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Figure 3. The UK stagnates over time while South Korea and Germany have caught up.


Index score

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Figure 4. With the exception of Indonesia and Saudi Arabia, most of the improvement is in the upper half of the

index.


2.1.2 There are large changes from 1995 to 2008 for many countries

The LCCI has also been calculated for 1995 and 2000 as well as for 2005 and 2008 and the results of this are

presented in Figure 6 and Figure 5. The overall pattern is that those countries in the top half are improving

their performance over time, while many of those in the lower half are stagnating. Australia is the only

country which has a score in 2008 lower than that in 1995; although other countries such as Canada, South

Africa, the UK and India also show little improvement. Some of the biggest improvements over time are

seen in China, South Korea and Mexico.

Change 2005 to 2008

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Index score

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Figure 5. Indonesia, Mexico, China and Korea show the largest improvement in the Low Carbon Competitiveness Index from 1995 to 2008, while Australia, South Africa,

India and the UK show the smallest improvement


Year

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1996 1998 2000 2002 2004 2006 2008

Country

aaaa Argentina

aaaa Australia

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aaaa United States


Figure 6. Most countries’ scores improve from 1995 to 2008, with Australia being the notable exception.


Change 1995 to 2000

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Figure 7. From 1995 until 2008, Australia is the only country not to have improved its index score


Change 1995 to 2008

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2.2 Rankings in the LCCI by sub-component

Countries can also be ranked according to their early preparation,

sectoral composition and future prosperity

2.2.1 Early preparation

The early preparation category accounts for around 19 per cent of the overall score. The variables included in

this category are:

– annual growth in greenhouse gas emissions;

– price of diesel fuel;

– efficiency of oil refining as a proxy for industrial sector energy efficiency;

– new sustainable energy investment;

– electricity distribution losses; and

– the carbon intensity of electricity generation.

These variables reflect the fact that the transition to a low-carbon economy will be more costly if it has to

occur over a shorter time period. A short transition will likely mean significant losses from stranded capital

assets as well as high transaction costs as institutions will not be sufficiently developed to expand the low-

carbon economy. Countries which prepare early will face lower transition costs, and so will be better placed

to remain competitive with carbon constraints.

Early preparation in the context of the LCCI is achieved if a country has:

– a lower rate of growth in greenhouse gas emissions, as the transition to carbon constraints will involve a

smaller turnaround;

– a higher price of diesel fuel as the vehicle fleet and logistics infrastructure will be better-suited to higher

fuel prices;

– higher energy efficiency in industry, as a price on emissions will have a smaller impact on costs;

– higher levels of new energy investment, as capital will be able to exploit emerging commercial

opportunities;

– lower electricity distribution losses, as a proxy for the sophistication of the electricity grid which is likely

to be important in a low-carbon future; and

– a lower carbon intensity of electricity generation, as this will reduce the costs from stranded capital in

emissions-intensive electricity generation.

Figure 8 shows how the early preparation component of the index has changed over time. Australia ranks

slightly below average in this category.

The USA has the highest score for early preparation in 2008, followed by France and then Germany. The

United States has, by some distance, the highest levels of investment in sustainable new energy on its stock

market, and also has levels of industrial energy efficiency which are above average and electricity

distribution losses which are below average. France and Germany have the lowest rate of growth in


greenhouse gas emissions and some of the highest fuel prices. France also has the least emissions-intensive

electricity supply while Germany has the second-highest amount of sustainable new energy investment.

Mexico and India have the two lowest scores in this category. India has the most emissions-intensive

electricity supply along with high distribution losses. Mexico has the least efficient oil refineries and, with a

number of other countries, no new investment on the stock market in sustainable new energy.

Over time there have been steady reductions in all countries of distribution losses from electricity networks,

and the price of diesel has also been increasing in all countries due to both regulatory and market factors.

The largest improvements in this category from 1995 to 2008 have been made by China, Brazil, France,

Germany and the USA.

Figure 8. The USA, France and Germany have the highest score for early preparation in 2008.


2.2.2 Sectoral composition

The sectoral composition category accounts for around 35 per cent of the overall score. The variables

included in this category are:

– transport energy consumption per capita;

Early preparation score

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– deforestation rate;

– share of high technology exports;

– size of the road transport sector;

– balance of emissions embodied in trade;

– amount of air freight; and

– clean energy production.

These variables reflect the fact that economies which have a more emissions intensive structure – for

example, through exporting carbon-intensive goods and having carbon-intensive electricity and transport

sectors – will face a greater challenge in remaining competitive in a carbon constrained world.

A country achieves a higher score in sectoral composition in the LCCI if:

– the transport sector is an important upstream provider of services to many other sectors of the economy

and so an economy will be more competitive with carbon constraints if it has low transport energy

consumption per capita;

– the deforestation rate is low (or the reforestation rate is high) as the land sector can provide emissions

credits to offset industrial and other emissions;

– there is a high share of high technology exports, because these are usually low-emissions intensity and

high value;

– it has a smaller road transport sector, measures as fewer cars per capita, as transport will become more

costly with carbon constraints;

– there is a lower balance of emissions embodied in trade, because countries with emissions-intensive

exports may suffer a deterioration in their terms of trade with carbon constraints;

– the amount of air freight is lower, as this is the most emissions-intensive way to transport goods; and

– if the amount of existing clean energy production (including electricity, transport, and industrial) is

higher.

Figure 9 shows how the sectoral composition component of the index has changed over time. Sectoral

composition is a key factor behind Australia’s position being in the lower half of the index. Along with Saudi

Arabia and the USA, Australia is amongst those countries facing the biggest challenge from its sectoral

composition in remaining competitive in a low carbon future. Australia has the lowest level of overall clean

energy production, the second highest number of cars per capita, and relatively high deforestation and

emissions per capita from the transport sector. The USA has, by far, the largest amount of air freight and the

most emissions per capita from transport sector. Saudi Arabia has the lowest share of high technology

exports and clean energy production.

France, South Korea and China have the best scores on sectoral composition. France has the highest level of

clean energy production, the least emissions-intensive exports and relatively low levels of car ownership,

while South Korea has the highest share of high technology exports. China has low emissions per capita

from the transport sector, the highest rate of reforestation, and the second highest share of high technology

exports.


Figure 9. France, South Korea and China have the best sectoral composition scores


2.2.3 Future prosperity

The future prosperity category accounts for around 46 per cent of the overall score. The variables included in

this category are:

– human capital investment, measured by education expenditure;

– physical capital investment, measured by the rate of fixed capital formation;

– natural capital investment, measured by the depreciation of natural capital;

– population growth;

– GDP per capita; and

– the cost of business start up procedures.

This high weight reflects the fact that many of the same variables that contribute towards prosperity today

will also be important in a carbon-constrained future. A country can achieve a higher score in the future

prosperity category of the LCCI if it has:

– high educational expenditures and investment in physical capital;

– low depreciation of natural capital (such as low depletion of energy, forest and mineral resources);

Sectoral composition score

Co

un

try c

od

e

SAU

IDN

IND

AUS

ZAF

RUS

ARG

MEX

TUR

BRA

ITA

USA

CHN

CAN

GER

KOR

GBR

JPN

FRA

0.2 0.3 0.4 0.5 0.6 0.7 0.8

Year

1995

2000

2005

2008


– lower population growth, as a higher population implies fewer emissions per head to generate wealth in a

carbon-constrained future;

– high existing GDP per capita, as wealthier countries will be better able to make the required investments

in adaptation and mitigation; and

– a lower cost of starting a business, as a proxy for the ease with which entrepreneurs will be able to take

advantage of new opportunities.

Figure 10 shows how the future prosperity component of the index has changed over time. Large

improvements have been seen in some of the fast-growing emerging economies such as Indonesia, Brazil

and Saudi Arabia. However, fast growth is not enough for a good score in this category: the country must

also be investing in human, physical and natural capital at the same time.

Japan, Germany and the USA have the highest scores in this category. Japan has low population growth, low

depletion of natural capital and the highest level of GDP per capita, but relatively low spending on education.

Germany scores well in all variables in this category; as does the USA with the exception of investment in

physical capital, which is relatively low.

Australia ranks in the middle for this category with higher than average spending on education, levels of

GDP per capita and ease of starting up a business, but lower than average investment in physical capital and

a relatively high rate of natural capital depreciation. The deterioration in Australia’s future prosperity score is

due to declining investment in education and higher population growth.

Saudi Arabia, while still ranked low overall in this category due to very high depletion of natural resources,

has improved over time due to a reduction in the costs of starting up a new business and in the rate of

depletion of natural capital. Indonesia has also made it cheaper to start a new business, as well as greatly

increasing spending on education and reducing its population growth rate.


Figure 10. Japan, Germany and the USA have the highest future prosperity scores.


Future prosperity score

Co

un

try c

od

e

SAU

IDN

IND

AUS

ZAF

RUS

ARG

MEX

TUR

BRA

ITA

USA

CHN

CAN

GER

KOR

GBR

JPN

FRA

0.2 0.3 0.4 0.5 0.6 0.7 0.8

Year

1995

2000

2005

2008


2.3 Country analysis

A closer look at the performance of eight countries

In this section the movement for eight selected countries is analysed in more detail; namely, Australia,

Canada, China, France, Japan, South Africa, South Korea and the USA.5 Figure 11 shows the LCCI score for

these eight countries only for 1995, 2000, 2005 and 2008. Australia’s score is the only one of these seven to

decrease consistently over time, although South Africa stagnated from 2000 after an initial improvement.

The largest increases over time were observed in China, France and South Korea. Most countries do not

show a consistent improvement over time however, it is common for a country to have one or two periods in

which its score declines, even if the overall pattern is one of an increase.

Figure 12 considers the change in the index for these eight countries only from 2005 to 2008. All countries

have been improving their score in the early preparation category. Sectoral composition has been relatively

static, with the exception of France and Canada, where the category score has gone up, and China, where it

has gone down markedly. Japan, China, and, to a lesser extent, France, have achieved higher scores in future

prosperity, but those in the other five countries have become lower to a greater or lesser extent.

In recent years the largest increases in the low carbon competitiveness score have been in France, the USA

and Japan. The increases are driven by improvements in different categories. In the case of the USA this

stems from an improvement in the early preparation category, for France it is driven by a large improvement

in the sectoral composition category and for Japan the largest improvement has been in future prosperity.

Australia’s early preparation score has risen, but this is offset by a worsening performance in sectoral

composition and future prosperity. China has experienced modest improvements in early preparation and

future prosperity, but a reduction in its score from the sectoral composition categories. Figure 13 presents the

overall and category scores for each of the four years considered in this report.

5 While Indonesia improves significantly in the recent index, this is due to variables in future prosperity, such as spending on education

and the cost of business start up procedures, which do not directly relate to carbon emissions.


Figure 11. Australia’s score worsens over time while South Africa stagnates


Index score

Co

un

try c

od

e

AUS

ZAF

USA

CHN

CAN

KOR

JPN

FRA

0.4 0.5 0.6 0.7 0.8

Year

1995

2000

2005

2008


Figure 12. While all countries improve in their early preparation score, the evidence is mixed for the sectoral

composition and future prosperity score.


Index score change 2005 to 2008

Co

un

try c

od

e

AUS

ZAF

USA

CHN

CAN

KOR

JPN

FRA

-0.01 0.00 0.01 0.02 0.03 0.04

Early preparation score change 2005 to 2008C

ou

ntr

y c

od

e

AUS

ZAF

USA

CHN

CAN

KOR

JPN

FRA

0.00 0.05 0.10 0.15 0.20

Sectoral composition score change 2005 to 2008

Co

un

try c

od

e

AUS

ZAF

USA

CHN

CAN

KOR

JPN

FRA

-0.06 -0.04 -0.02 0.00 0.02 0.04 0.06 0.08

Future prosperity score change 2005 to 2008

Co

un

try c

od

e

AUS

ZAF

USA

CHN

CAN

KOR

JPN

FRA

-0.03 -0.02 -0.01 0.00 0.01 0.02 0.03 0.04


Figure 13. There have been some large changes within each of the three categories, even in cases where

the overall score is relatively constant over time


Index score

Co

un

try c

od

e

AUS

ZAF

USA

CHN

CAN

KOR

JPN

FRA

0.4 0.5 0.6 0.7 0.8

Year

1995

2000

2005

2008

Early preparation score

Co

un

try c

od

e

AUS

ZAF

USA

CHN

CAN

KOR

JPN

FRA

0.4 0.5 0.6 0.7 0.8

Year

1995

2000

2005

2008

Sectoral composition score

Co

un

try c

od

e

AUS

ZAF

USA

CHN

CAN

KOR

JPN

FRA

0.4 0.5 0.6 0.7 0.8

Year

1995

2000

2005

2008

Future prosperity score

Co

un

try c

od

e

AUS

ZAF

USA

CHN

CAN

KOR

JPN

FRA

0.4 0.5 0.6 0.7 0.8

Year

1995

2000

2005

2008


Table 3 lists the variables for each country which have made the biggest positive and negative contributions

to the change in the score of each of these seven countries from 2005 to 2008. The higher price of diesel fuel

led to an increase in the score of all countries; although the relative increase was larger in some countries

(e.g. China) than in others (e.g. Canada). Many G20 countries also saw an improvement in the balance of

emissions embodied in trade (i.e. a decrease in the emissions intensity of exports relative to imports) but, at

the same time, a decrease in the share of high technology exports.

Table 3. Each country has improved its performance in some areas and deteriorated in others

Country Variables contributing to a higher LCCI score

in 2008 compared to 2005

Variables contributing to a lower LCCI score in

2008 compared to 2005

Australia Higher price of diesel fuel Lower energy per capita in transport sector Lower emissions intensity of electricity

Higher population growth Higher deforestation Higher natural capital depreciation

Canada Relative reduction in exports emissions intensity Relatively fewer cars per capita Higher price of diesel fuel

Higher electricity distribution losses Less new energy investment Higher rate of greenhouse gas emissions growth

China Higher price of diesel fuel Lower cost to start a business Higher investment in physical capital

Lower reforestation rate Higher use of air freight Lower share of high technology exports

France Higher price of diesel fuel Relative reduction in exports emissions intensity Lower energy per capita in transport sector

Less new energy investment Higher use of air freight Lower educational expenditure

Japan Higher price of diesel fuel Fewer cars per capita Higher investment in physical capital

Lower share of high technology exports Lower share of clean energy production Lower efficiency of oil refineries

South Africa Higher price of diesel fuel Relative reduction in exports emissions intensity Lower cost to start a business

Higher natural capital depreciation Lower share of high technology exports Lower educational expenditure

South Korea Higher price of diesel fuel Relative reduction in exports emissions intensity Higher GDP per capita

More cars per capita Lower share of high technology exports Lower oil refinery efficiency

USA Higher new energy investment Higher price of diesel fuel Less transport energy consumption per capita

Lower investment in physical capital Lower share of high technology exports More use of air freight



Appendix: constructing the LCCI

The following text is based upon the description in the 2009 report. An initial data collection exercise

provided 36 variables which were considered likely to be linked to a country’s low carbon competitiveness

and which had sufficient coverage across all countries and across a sufficient number of years. These

variables reflected the fact that a country’s low carbon competitiveness can be improved either by reducing

its carbon emissions for any given level of output (e.g. by switching from ‘dirty’ to ‘clean’ electricity

generation) or by increasing its level of output for any given level of emissions (e.g. by improving the

education opportunities for its residents).

The variables were assigned to one of three categories that were chosen to represent different, although

clearly related, elements which will determine performance in a low carbon future: sectoral composition,

early preparation and future prosperity:

– The sectoral composition category captures how well, or otherwise, the composition of the economy is

currently structured towards less emissions intensive activities. It is included because the relative prices of

output in different industries will change systematically. Countries whose economies are more heavily

weighted towards sectors which will experience lower demand will be relatively worse off. For example,

the measure of the balance of emissions embodied in trade, similar to the carbon intensity of exports,

developed by Peters and Hertwich (2008) is part of this category, as is transport sector energy

consumption.

– Early preparation variables include indicators reflecting the steps that countries have already taken to

move towards a low carbon economy. They are included for two reasons. First, the cost of using and

developing low carbon technologies can be expected to fall over time as more experience is gained. This

effect is also known as learning by doing and is a well established phenomenon that has been observed in

many industries, notably in the power sector (McDonald and Schrattenholzer (2001). Countries which are

early adopters of energy efficient or low carbon technologies will experience higher rates of learning and

so will be better placed to generate material prosperity in the future. Second, the costs of shifting to a high

carbon economy will be higher as the period over which the shift has to occur becomes shorter. For

example, shifting to low carbon electricity is more costly over a shorter time period because the capital in

existing power stations has to be retired early. For these two reasons, countries which take early action

will have higher standards of living in a low carbon future. The carbon intensity of electricity and

investment in sustainable energy businesses are examples of indicators in this category.

– The final category consists of variables which will determine future prosperity through their impact on

the level of production of goods and services (broadly defined) per capita. The future level of production

will be determined by the future level of capital in the economy. Accordingly, we include measures of the

rate of change of human capital, physical capital and natural capital from the World Bank (2006). The

measure of natural capital captures the change in a country’s stocks of resources, such as agricultural

land, minerals and forests. If countries deplete their stock of natural capital, it reduces their capacity to

produce goods and services (such as timber or clean water) from the natural environment in the future.


The level of GDP per capita is included, as prosperity is highly persistent over time, as is population

growth, to reflect the fact that countries with higher populations will need to divide the output from the

fixed stock of emissions over a greater number of people.

With this data, statistical techniques were used to establish which of these variables, in the recent past, has

had the strongest association with low carbon competitiveness - defined as GDP per tonne of emissions in

this report. It should be emphasized that association does not necessarily imply causation: in many cases the

variables should be considered as proxies for the underlying, but more difficult to measure, driver of carbon

productivity; the efficiency of oil refining can be seen as a proxy for the efficiency of the industrial sector as

a whole, while the percentage of electricity distribution losses is a proxy for the overall sophistication of the

electricity grid (necessary if decentralized clean electricity generation is to be effectively harnessed).

Those variables which were both deemed to be positively associated with a good performance and reached a

certain threshold of significance were then selected.

In order to translate these criteria into a single index, weights need to be assigned to each component. This is

not a straightforward task, and there is no universally accepted method for doing this (see Morse and Fraser

(2005) and Esty et al (2005) for a discussion of some of the issues). The approach taken by this report is to

use the econometric analysis to understand the relative importance of each individual variable within the

index. As each individual variable is allocated to one of the three categories, the appropriate weight for each

category can be ascertained as the sum of the individual weights of its component indicators. Then, within

each category, all indicators have been weighted equally.

Due to the econometric approach taken to the weightings the index is cardinal; that is, the size of the gap

between countries provides information on the relative distance between them. Because the values of the

indicators were all transformed to be between zero and one, a difference of 0.01 in the index could be

interpreted as the distance a country would move if all of its indicators moved one per cent closer to best

practice.


Appendix: data preparation

Data revisions for 2005

Some of the data used to construct the 2005 index has since been updated, and so the 2005 rankings

presented in this report differ slightly from those presented in the original report. An overview of the changes

is shown in Figure 14. On the whole, data revisions are relatively small and so rankings are only affected

where two countries were very close to begin with.

Data revisions, e.g. by the World Bank, have led to a revised version of the 2005 LCCI. The World Bank and

the IEA have revised variables such as the capital formation and cost of business start-up for 2005. Variables

such as the size of road transport have become available for 2005, whereas estimates have been used before.

The revised 2005 index will be used in the inter-temporal comparison.

Due to the revision there are some slight changes over the original 2005 ranking as the index scores are, for

some countries, very close to each other as is shown in Figure 15. While the score changes due to the

revision are minimal, South Korea moves into second place, overtaking the UK and Japan. A minimal

change in scores also causes Russia to fall behind Argentina and Mexico and South Africa to overtake

Australia in the revision. Some larger changes in the index score occur for Saudi Arabia and Indonesia but

their ranking is unaffected.


Figure 14. Data revisions mean that the rankings for 2005 are slightly different from those in the original

report


Country code

Ind

ex r

an

k

19

18

17

16

15

14

13

12

11

10

9

8

7

6

5

4

3

2

1


Year

Revised 2005 index

Original 2005 index


Figure 15. Data revisions resulted in slight changes to the 2005 index


Back-casting the index to 1995 and 2000

Most of the data is available for 2000 and 1995. Where data was missing for certain variables, different

assumptions have been made to enable construction of an index which is directionally accurate.

Two variables, emissions embodied in trade and new sustainable energy finance, have been assumed to be

the same as in 2005 as they are not available for 2000 and 1995. For 1995, the World Bank doesn’t provide

data for the cost of business start-up procedures and they have been taken to be the same as in 2000.

Country code

Ind

ex s

co

re

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8


Year

Revised 2005 index

Original 2005 index


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NRTEE. (2010). Measuring up: benchmarking Canada’s competitiveness in a low-carbon world.

OECD. (2011). Towards Green Growth: Monitoring Progress.

Peters, G. P., & Hertwich, E. G. (2008). CO2 embodied in international trade with implications for

global climate policy. Environmental Science and Technology, 42(5), 1401-1407.

Peters, G. P., Minx, J. C., Weber, C. L., & Edenhofer, O. (2011). Growth in emission transfers via

international trade from 1990 to 2008. Proceedings of the National Academy of Sciences of the

United States of America, 108(21), 8903-8908.

PricewaterhouseCoopers. (2011). Counting the cost of carbon - Low carbon economy index 2011.

Carbon.

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