PROJECT N. 037033

EXIOPOL

A NEW ENVIRONMENTAL

ACCOUNTING FRAMEWORK USING

EXTERNALITY DATA AND INPUT-

OUTPUT TOOLS

FOR POLICY ANALYSIS

EXIOPOL DELIVERABLE DI.1.A-1

CONCISE REPORT WITH EXPECTATIONS

OF THE OUTCOME OF THIS PROJECT

FROM POLICY CIRCLES, AND

IMPLICATIONS FOR CLUSTER II AND III

Authors: Frederik Neuwahl, Alejandro Villanueva European Commission Joint Research Centre, Institute for Prospective Technological Studies

Chiara Travisi

Fondazione Eni Enrico Mattei

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Title CONCISE REPORT WITH EXPECTATIONS OF THE OUTCOME OF THIS PROJECT FROM POLICY CIRCLES, AND IMPLICATIONS FOR CLUSTER II AND III

Purpose

Filename EXIOPOL_DI_1_A1.doc

Authors Frederik Neuwahl, Alejandro Villanueva, Chiara Travisi

Document history

Current version.

Changes to previous version.

Date 15.07.2008

Status Draft

Target readership

General readership

Dissemination level

Frederik Neuwahl, editor EC Joint Research Centre: Institute for Prospective Technological Studies (IPTS)

July 2008

Prepared under contract from the European Commission

Contract no 037033-2 Integrated Project in PRIORITY 6.3 Global Change and Ecosystems in the 6th EU framework programme

Deliverable title: REPORT ON EXPECTATIONS OF

THE OUTCOME OF THIS PROJECT FROM POLICY CIRCLES, AND IMPLICATIONS FOR CLUSTER II AND III

Deliverable no. : DI.1.A-1 Due date of deliverable: Month n 15 Period covered: from 1st March 2007 to 1st March

2011 Actual submission date: 15.07.2008 Start of the project: 01.03.2007 Duration: 4 years Start date of project: Project coordinator: Project coordinator organisation: FEEM

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Table of contents

1 INTRODUCTION............................................................................................ 3

2 APPLICATION OF EE IO METHODS FOR POLICY ANALYSIS ............... 5

2.1 Introduction............................................................................................. 5

2.2 Potential application areas for EEIO models ......................................... 5

2.2.1 Introduction ..................................................................................... 5

2.2.2 Environmental problem analysis .................................................... 6

2.2.3 Prospective (impact) analysis of policies ......................................... 8

2.2.4 Monitoring and ex post analysis of policies .................................. 10

3 APPLICATION OF EXTERNALITY VALUATION METHODS FOR POLICY ANALYSIS ............................................................................................. 12

3.1 Introduction........................................................................................... 12

3.2 Potential application areas for externality valuation .......................... 12

3.2.1 Introduction ................................................................................... 12

3.2.2 Assessment, prioritisation and ranking of externality risks and impacts 12

3.2.3 Ex ante policy options appraisal ................................................... 14

3.3 Current trends in the application of externality valuation for policy making............................................................................................................... 16

4 EXIOPOL AND THE EC POLICY COMMUNITY ...................................... 18

4.1 Introduction........................................................................................... 18

4.2 Policy user group ................................................................................... 19

4.3 Feedback from the Policymakers' group and implications for the project................................................................................................................ 20

4.3.1 Introduction ................................................................................... 20

4.3.2 a) Methodological aspects .............................................................. 20

4.3.3 b) Implementation and maintainability of the tool....................... 23

4.3.4 c) Potential case studies ................................................................ 24

5 CONCLUSIONS............................................................................................ 27

Annex I: TARGET AUDIENCE (USER GROUP)................................................ 28

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1 INTRODUCTION

EXIOPOL is a project funded by the European Commission under the 6th framework programme, priority 6.3 Global Change and Ecosystems. The consortium comprises a large number of partners and covers a variety of relevant research expertises in the field of environmental valuation and Environmentally Extended Input-Output assessment. Overall 38 universities and centres of research from Europe, China and India are involved. The project has taken off in March 2007 and will last up to March 2011.

The research objectives of EXIOPOL are structured along two main pillars that converge in a thrid targeted to the use in EU policy assessment.:

Pillar I: to synthesise and develop further estimates of the external costs of key environmental impacts for Europe;

Pillar II: to set up an environmentally extended (EE) Input-output (IO) framework in which as many of these estimates as possible are included, allowing the estimation of environmental impacts and external costs of different economic sector activities, final consumption activities and resource consumption for countries in the EU;

Pillar III: to apply the results of the external cost estimates and EEIO analysis for the analysis of policy questions of importance, as well as for the evaluation of the value and impact of past research on external costs on policy-making in the EU.

This document reports on desk research and on a two-stage consultation, comprising a series of meetings and the circulation of a consultation document, addressed to a "user group" of EC departments active in policy areas where EXIOPOL will be in principle well suited to contribute informing the policymaking. The primary purposes of those activities were to test and refine the project work programme (pillars I and II) against the real needs of the policy community and to collect specific elements with a view to fine-tuning the scope of the policy questions to be analysed as "Pillar III" taking into account as much as possible the needs of the user group. Note however that for reasons –inter alia- of timing it is beyond the scope of this document to compile a final list of case studies to be undertaken by the project.

The document elaborates concisely on the potential areas of policy application of Externality research and of EEIO methods; clarifies the potential by means of selected recent examples; and endeavours to establish exemplary relations with specific demands laid out in the following policy dossiers currently on the agenda of the EC:

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Natural Resources: TSSUR (2005)

COM(2005) 670 final. COMMUNICATION FROM THE COMMISSION TO THE COUNCIL, THE EUROPEAN PARLIAMENT, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS Thematic Strategy on the sustainable use of natural resources

Waste: TSPRW (2005)

COM(2005) 666 final COMMUNICATION FROM THE COMMISSION TO THE COUNCIL, THE EUROPEAN PARLIAMENT, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS Taking sustainable use of resources forward: A Thematic Strategy on the prevention and recycling of waste and COMMISSION STAFF WORKING DOCUMENT (2004). Impact Assessment on the Thematic Strategy on the prevention and recycling of waste and the immediate implementing measures. NON-OFFICIAL DOCUMENT

Products: IPP (2003)

COM(2003) 302 final. COMMUNICATION FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN PARLIAMENT. Integrated Product Policy. Building on Environmental Life-Cycle Thinking

Consumption and Production: APSCP (Expected May 2008)

COM (expected 2008): Communication from the Commission to the Council and the European Parliament on the Sustainable Production and Consumption and Sustainable Industrial Policy Action Plan.

Energy: EPU (2007)

COM(2007) 1 final. COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN COUNCIL AND THE EUROPEAN PARLIAMENT. AN ENERGY POLICY FOR EUROPE

Environmental technologies: ETAP (2004)

COM(2004) 38 final. COMMUNICATION FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN PARLIAMENT. Stimulating Technologies for Sustainable Development: An Environmental Technologies Action Plan for the European Union

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2 APPLICATION OF EE IO METHODS FOR POLICY ANALYSIS

2.1 Introduction

Environmentally extended input-output (EEIO) tables and models have become a powerful element in supporting information-based environmental and economic policies. Briefly stated, monetary input-output (IO) tables give insight into the value of economic transactions between different sectors in an economy, including output for exports, capital formation and final government and private consumption. They allow for calculating the added value that each sector contributes to the final output of an economy. Such monetary IO tables can be ‘extended’ with environment-related information for each sector, such as its emissions, primary (natural) resource use, land use and other external effects per sector. These environmental externalities may be expressed in monetary terms as well. The same framework can be used to add other information, for example related to the pillar of sustainability concerning social aspects, such as the number and quality of jobs per sector. And, last but not least, such EEIO tables can be integrated in more sophisticated models, such as computable general equilibrium (CGE) models or macroeconometric models.

This ensemble forms a powerful toolkit for information-based policy-making based on a comprehensive accounting framework covering the entire span of economic activities. EEIO tables bring together economic and environmental data in a consistent framework that may identify from a few tens up to several hundred different economic activities. EEIO models based on them allow for analysing such data via a great variety of cross-sections of the economic system, such as the product perspective, or a sector perspective. EEIO tables and the related data collection system can fulfil multiple goals, and hence may open the opportunity to reduce significantly the effort in data gathering for analysis, ex-ante impact assessment and monitoring for a variety of environmental policy fields.

2.2 Potential application areas for EEIO models

2.2.1 Introduction

This chapter builds on the results of the study "Environmentally extended input-output tables and models for Europe" published in 2006 and accessible from the IPTS web. The following sections present a stylised classification for potential applications of EEIO tables and models based on EE-IO tables in support of environmental and other policy purposes. Three broad fields are identified in relation to the scope of analysis and to the different requirements in terms of data and of methodological approach:

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- environmental problem analysis;

- prospective (impact) analysis of policies

- Monitoring and ex post analysis of policies

2.2.2 Environmental problem analysis

This involves the analysis of the nature and causes of environmental problems, as related to resource use and emissions relevant for policy. The most important application of EEIO models for this purpose include analyses of: a) life-cycle environmental impacts of product groups (e.g. cars, meat,

houses, etc.); b) life-cycle environmental impacts of consumption expenditure categories,

per consumption category (e.g. the impact of food consumption at home and the impact of food consumption in restaurants);

c) life-cycle environmental impacts per consumer group (e.g. inhabitants of a city versus the rest of a country, car owners versus non-car owners, etc.);

d) life-cycle environmental impacts of products (in combination with LCA via so-called hybrid LCA-EEIO. In such hybrid LCA-EEIO, the impact of a specific product is analysed with LCA, and the impacts of process chains not included or ‘cut off’ in the LCA are estimated with the help of EEIO);

e) life-cycle impacts related to primary resources used (e.g. oil, copper, wood, etc.);

f) factors that are responsible for the main contributions to life-cycle impacts mentioned under the above points. Examples include the relative importance of impacts in the resource extraction, production, use and waste management stages; the relative importance of domestic impacts and impacts embodied in imports; and the sector mainly contributing to impacts of a consumer group, expenditure category, or product (group).

Among the prominent recent examples of EE-IO applications in support to European policies, the study EIPRO (Environmental Impact of PROducts) was conducted in the context of the Communication on Integrated Product Policy (COM(2003) 302 final). EIPRO used a highly detailed (~400 sectors, ~1200 environmental variables) EE-IO franework to identify the products that are consumed in the EU having the greatest environmental impact from a life-cycle perspective. From the study completed in May 2006 it emerged that three areas of consumption - food and drink, private transportation, and housing - together are responsible for 70-80 percent of environmental impacts of private consumption. Follow-up studies are currently underway at JRC-IPTS to improve the knowedge basis in those three areas. The table below provides examples of the potential use of EEIO methods to respond to environmental problem analysis needs in current EU policies:

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POLICYPOLICYPOLICYPOLICY Specific demand (Quotations from original Specific demand (Quotations from original Specific demand (Quotations from original Specific demand (Quotations from original text)text)text)text)

Potential uses of EEIO methods Potential uses of EEIO methods Potential uses of EEIO methods Potential uses of EEIO methods

TRPRW (waste)

"IMPROVING THE KNOWLEDGE BASE

Life-cycle thinking requires an improved knowledge base on the impact of resource use,

waste generation and management and more

systematic forecasting and modelling.[…] the

Joint Research Centre will continue to play a role

in building a robust scientific and economic information base for waste policy."

TSSUR (natural resources)

"Europe needs a long-term strategy that

integrates the environmental impacts of using

natural resources, including their external

dimension (i.e. impacts outside the EU, including

on developing countries) in policymaking."

"Informed policy-making requires knowledge of

how resources move through the global economy,

what drives this and what the impacts are wherever the resources are extracted and used."

"The objective is to reduce the negative

environmental impacts generated by the use of

natural resources in a growing economy. To

achieve this objective, the strategy includes actions to: (1) improve our understanding and

knowledge of European resource use, its negative

environmental impact and significance in the EU

and globally, (2) develop tools to monitor and

report progress in the EU, Member States and

economic sectors".

Consistent estimates of the life-cycle environmental impact of 5 waste-related sectors in each EU country can be produced, using EXIOPOL's 27 EU's SUTs, and having in mind that these tables contain 5 waste-related sectors (37.10 Recycling of metal waste and scrap, 37.20 Recycling of non-metal waste and scrap, 90.02.a Collection of waste, 90.02.b Incineration of waste, 90.02.c Landfill of waste) and report on no less than seven emission-related imapct categories (GW, Ozone depletion , Acidification, Photochemical ozone creation, Eutrophication, Toxicity to humans and to the environment) and no less than four primary resources categories (Primary energy carriers, abiotic resources, Biotic resources, Land use)

IPP (products)

"Identifying which products have the greatest

potential for environmental improvement

The Commission will seek to identify and stimulate action on those products with the

greatest potential for environmental

improvement.[…] However, as yet, there is no

analytically-based consensus on which products

have the greatest environmental impact, nor

therefore on those which have the greatest potential for environmental improvement.

The Commission will therefore initiate the

development of a methodology for identifying

these products at the European level."

This exercise was carried out through the project EIPRO (Environmental Impact of Products, 2003-2009), which identified the product groups that bear the largest environmental impacts in the EU. This prioritisation of product groups was carried out using two life-cycle thinking approaches, a bottom-up (LCA) and a top-down (EEIO). Combinations of the two are also possible (so-called hybrid IO-LCA approach).

AP SCP (consumption and production)

"Ambitious but well-focused future policies which

clearly prioritise key areas are needed."

"Focusing on key environmental issues: Global

climate change and the sustainable use of natural resources are presently among the greatest

environmental concerns. To be most effective, the

Commission therefore intends to focus on:

• Climate change and a low-carbon economy;

• Sustainable and efficient use of natural

resources, energy and materials; and • The SCP Action Plan could also address the

further phasing out hazardous substances and

endangered raw materials from production

processes and products."

When the assessment level regards sectors and product groups rather than specific products, the EEIO framework alone is a suitable tool for delivering information covering the key environmental issues mentioned in the Action Plan. Furthermore, assessments at the priduct level can be unedrtaken by means of hybrid LCA methods combining bottom-up information with IO-based information.

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2.2.3 Prospective (impact) analysis of policies

This involves the ex-ante impact assessment of policy measures and may include trend and scenario analysis; in this sense, carrying out analysis in this domain requires not only the application of an IO model to the data available but also the definition of policy-technology scenarios of various degree of complexity, often including the detailed specification of individual production technologies based on bottom-up information. The most important application of EEIO models for this purpose include:

a) economy-wide environmental and other implications of changes in life styles and consumption expenditure patterns, such as a shift from travelling to educational and cultural services;

b) economy-wide environmental and other implications of incremental or radical technical change of products or processes, such as a shift to coal-based hydrogen production for a large-scale diffusion of fuel cell technologies, combined with carbon sequestration;

c) economy-wide environmental and other implications of emission reduction measures, such as fine dust reduction in all combustion processes, including shifts to prevention;

d) economy-wide environmental and other implications of price effects, such as environmental taxation and other ways to internalise external effects (or other price effects in the aforementioned scenarios).

A recent example of EEIO applications for prospective analysis of EU policies is the study "Links between the environment, economy and jobs" published by DG ENV in 2007. This study used an EEIO model to analyse the links between the economy and the environment, including the supporting function of a good quality environment for many sectors in the economy. The study includes prospective analyses of the impact of environmental policies on jobs and employment.

Another example is in the preparation of the "Biofuels Progress Report" COM (2006)845 and "Renewable Energy Road Map" COM (2006) 848, where an IO-based model, extended with econometric specification of household consumption and aligned with sectoral agro-energy simulations, was developed to assess EU25-wide impacts on Employment and GDP of different scenarios.

The table below provides examples of the potential use of EEIO methods to respond to prospective analysis needs in current EU policies:

POLICYPOLICYPOLICYPOLICY SpecSpecSpecSpecific demand (Quotations from original ific demand (Quotations from original ific demand (Quotations from original ific demand (Quotations from original

text)text)text)text) Potential uses of EEIO methods Potential uses of EEIO methods Potential uses of EEIO methods Potential uses of EEIO methods

TRPRW (waste)

"2.2. Waste policies are based on poor knowledge

[…] it is important to have data and information

of acceptable quality covering the life cycle of the

waste materials in order to assess both the needs

for policy action and the achievements of policies.

Such information must cover waste in general and

not focus only on specific waste flows. This is

growing in importance as issues of increasing complexity need to be addressed by waste policies

[…].Clearly, the unavailability of data and

The EEIO model allows a static (i.e. for a fixed given year) quantification of the impacts of meso and macroeconomic (i.e. at sector level) of changes in waste policy e.g. targets for landfilling reduction or recycling increase; analysis of scenarios reaching the targets as presented in the Waste Framework Directive.

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information of appropriate quality can be a major

factor leading to sub-optimal waste management

practices and policies and also makes policy

assessment difficult."

TSSUR (natural resources)

"A better understanding of the environmental

impacts of resources use throughout life cycles will allow policy makers to better prioritise and

concentrate on areas where they can really make

a difference."

"At this initial stage, this strategy does not set

quantitative targets for “resource efficiency and the diminished use of resources” as prescribed by

the Sixth EAP because it is not possible to do so

with the current stage of knowledge and state of

development of indicators."

The EEIO model allows a quantification of the demand changes of at least four primary resources categories (Primary energy carriers, abiotic resources, Biotic resources, Land use) derived from any envisaged policy change that allows to be expressed quantitatively as an aggregated sector increment, e.g. targets for total monetary output or energy efficiency of a specific sector.

IPP (products)

"Following [consensus on which products have the greatest environmental impact, red.], for those

products that are towards the top of the list,

further analysis will be undertaken to identify all

possible ways in which the environmental impacts

can be reduced. For each of these possible ways the potential socio-economic impacts of each

measure will be assessed. This whole exercise is

likely to take three to four years. Once this

exercise has been completed, the Commission will

seek to address some of the products with the greatest potential for environmental improvement

at least socio-economic cost individually. "

APSCP (consumption and production)

"This Communication sets out an integrated

package of measures to deliver more sustainable

patterns of production and consumption […]. This

Action Plan aims to bring about significant

changes in patterns of production and consumption, moving towards a truly sustainable

path […]. The following documents accompany

this Action Plan […] in 2008/2009: promoting

resource efficiency; promoting eco-innovation;

developing industrial policy for environmental

industries; sectoral approaches; promoting good practice internationally; promoting international

trade in environmental goods and services.

The follow-up of the prioritisation exercise EIPRO (see section 1 on problem analysis above) is the project IMPRO (Environmental IMprovement of PROducts 2007- 2008). The IMPRO project identifies possible ways in which the life-cycle environmental impacts can be reduced for some of the products that are among those with the greatest environmental impacts (private transport, drink and food, housing). Some of these improvement assessments have already been carried out using EEIO methodologies. It is expected that the IMPRO results, can give valuable input to eco-design initiatives that will be launched under the forthcoming SCP Action Plan. Among the potential uses of EEIO are as well – provided basic economic data are available - assessments at sector level of the introduction of environmental taxes (e.g. differenciated VAT, env. taxes on production or env. taxes on consumption). EEIO can also be used to assess the life-cycle environmental impacts of resource efficiency scenarios in given sectors (see potential uses under TSSUR above).

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2.2.4 Monitoring and ex post analysis of policies

This involves the ex-post analysis of impacts and effectiveness of policy measures, generally speaking by analyising data sets including time series embracing the relevant time span; this also indicates that the availability of time series of economic accounts and environmental data comparable over the entire time span is essential. Prominent examples of application of EEIO models for this purpose are:

a) analysis of the relation between environmental impact, be it emissions, total material requirement, or a specific impact, and economic output, via a variety of cross sections of the economy (for instance for a specific industry sector, a specific product group, a specific consumption expenditure category);

b) in relation to the former point: monitoring of eco-efficiency ratios (impact per unit of value added generated);

c) decomposition analysis of observed changes in the aforementioned ratios (for instance whether decoupling between CO2 emissions and economic growth is caused by a change in consumption patterns, change in technology structure, in production structure, or a change in emission factors).

Although the conceptual framework of this field of application is relatively straightforward, operational examples for the entire EU are scarce. This is due essentially to limitations in data availbality, as comparable time series of sufficient geographic, time and environmental extensions coverage have not been until now at hand. Note that EXIOPOL will not close the time series gap, but it is expected that the state of the art in this area will receive a considerable hoist in the FP7. On national scale, one of several exemplary studies is that of the Federal Statistical Office of Germany for carbon dioxide emission changes between 1993 and 2000. The table below provides examples of the potential use of EEIO methods to respond to ex-post assessment needs in current EU policies:

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POLICYPOLICYPOLICYPOLICY Specific demand (Quotations from original Specific demand (Quotations from original Specific demand (Quotations from original Specific demand (Quotations from original

text)text)text)text) Potential uses of EEIO methods Potential uses of EEIO methods Potential uses of EEIO methods Potential uses of EEIO methods

TRPRW (waste)

"MONITORING AND EVALUATION: The

strategy will be monitored on an ongoing basis.

This will require a continuous effort to improve

statistics on landfill and recycling and to build a stronger knowledge base relative to environment

impact and impact indicators. Assessment of

national waste policies and of Member States’

implementation reports […] will contribute to

this"

"The Commission will review the progress made

towards achieving the strategy’s objective in

2010. This review will, in particular, assess

progress on waste prevention policies, on

applying life-cycle thinking to waste management and towards a European recycling society"

TSSUR (natural resources)

"Measuring progress – developing indicators

Working towards the strategy’s objective demands

that progress be measured adequately, and that

the information be available to policymakers and

citizens. Further development of a set of

indicators is needed, building on the substantial

work already undertaken in the fields of

environmental accounting, material flow

accounting and life cycle inventories"

Provided that identification of indicators sensitive to policy changes is possible, future updates of the EEIO database (both the country SUT data and the environmetnal extension data) could allow a quantification of the sector-level environmental impacts derived from policy implementation.

IPP (products)

No specific references found

APSCP (consumption and production)

No specific references found besides "The Commission will review progress and report

on the implementation of the Action Plan in 2011"

The EEIO model allows a static (i.e. for a fixed given year) quantification of the impacts of changes in policy (e.g. taxes, or targets based on physical units) that affect product groups –but not specific products. Additionally, hybrid LCA enriched with input-output information of the level of detail provided by EXIOPOL is an emerging methodology representing a significant advance for the analysis at product level.

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3 APPLICATION OF EXTERNALITY VALUATION METHODS FOR POLICY ANALYSIS

3.1 Introduction

Externalities arise when the decisions of some economic agents (individuals, firms, governments) – whether in production, in consumption, or in exchange – affect other economic agents, and are not included in the price system of commodities, i.e. are not compensated. Hence, economic agents consider only their private marginal costs, when making decisions, disregarding the total – or social marginal – costs of their actions. As a result, private decision making in economic sectors might lead to goods with socially undesirable characteristics being sold in socially inefficient quantities. In brief, some significant economic factor goes ‘unpriced’, so that economic activity is undertaken without consideration of its full impact. In environmental decision making, pricing the unpriced becomes crucial for enhancing policy solutions and allowing efficient options appraisal. Valuation of externalities therefore acquires a central role that is discussed below in the context of policy analysis.

3.2 Potential application areas for externality valuation

3.2.1 Introduction

In general terms, decision makers can be supported by the results of environmental valuation performed in two stages of making environmental risk (or impact) management decisions:

- Assessment, prioritisation, and ranking of risk and impacts: to generate robust order-of-magnitude estimates of the cost of externalities, so that their relative importance can be established.

- Policy options appraisal (ex-ante): to generate valid order-of-magnitude estimates of the net benefits of policy strategies for tackling specific environmental risks.

3.2.2 Assessment, prioritisation and ranking of externality risks and impacts

In this concern, the role of externality valuation is to estimate the economic value (positive or negative) of a given environmental risk, stemming from a given economic sector (e.g. agriculture or chemical industry), in the absence of policy strategies. The reference scenario would be defined by the ongoing situation, in a given geographical and temporal context, in the absence of policy actions to manage the risk. When analysing future events, more realism might also be introduced by constructing projections of future natural, environmental and socio-economic conditions in the study region, in the absence of mitigation

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or risk management strategies. The value of this information is that it reveals to decision makers those impacts that are likely to cause the most severe damage and, thus, those risks to which most attention should be given.

A prominent example of environmental externality valuations in support to EU policies is the EU funded ExternE project. ExternE is the first comprehensive attempt to use a consistent 'bottom-up' methodology to evaluate the external costs associated with a range of different fuel cycles, as well as transport.

The table below illustrates some of the applications of ExternE in integrated decision making:

- Economic evaluation of the draft directive on Non-hazardous waste Incineration (1997) - Study of public transport modes along the Edgware Road corridor (1997) - Regulatory appraisal of the NO2 and PM10 air quality objectives. (1997) - Regulatory appraisal of the SO2 air quality objectives. (1997). - Cost and benefits of the Multi-pollutant, Multi-effect protocol. (1998) - Economic evaluation of the costs and benefits of acidification and ground level ozone.

(1998) - Non-health benefits of the National Air Quality Strategy (1998) - Cost-effectiveness analysis of health impacts. (1998) - Comparative Risk Assessment of Electric Power Technologies. (1998) - Economic evaluation of costs and benefits for the Emission Ceilings Directive. (1998) - Comparison of the external costs of renewable energy technologies versus conventional

sources. (1998) - Cost-benefit analysis of proposals under the UNECE Multi-pollutant, Multi-effect

protocol. (1999) - Economic Evaluation of Air Quality Guidelines on CO and Benzene (1997-1999) - Cost benefit analysis of NOx and VOC control under the UNECE Multi-pollutant, Multi-

effect Protocol (1997-1998) - Quantification and valuation of the health effects of fine particles. (1999) - The environmental costs of lorries: a study to incorporate environmental costs in vehicle

excise duty rates. (1999) - Economic evaluation of diverting PVC from incineration to landfill and recycling (1999) - Surface transport costs. A study of the comparative environmental costs of road and rail

in the UK. (2000) - A comparison of the external costs of very large lorries and rail freight in the UK. - Guidance on Reducing the Environmental Impacts of Urban Energy-Use in Developing

Countries. (2000) - Economic evaluation of air quality limits for PAHs (2000) - Economic Evaluation of the Diversion of PVC from Incineration (2000) - Study of the Benefits of Compliance with the EU Environmental Acquis: Quantification of

the benefits of air quality improvements. (2000) - A Regulatory and Environmental Impact Assessment (REIA) on the Second Daughter

Directive Concerning Air Quality Limits for CO and Benzene. (2000) - Development of an integrated approach to environment and health - Environmental impacts upon technology, employment and competitiveness to 2010:

Environmental quality and health (2000) - Economic evaluation of the Second NOx Protocol (1998-2000). - Current, historical and future external costs of the UK power generation sector. (2000) - Comparison of external effects from CPH plants with those from separate production of

power and heat. (1999) - Assessment of the production of energy from biomass. (2000) - Economic evaluation of the large combustion plant directive. (1999) - Greensense: Integrated Accounting and Sustainability (2001-2003)

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More recently, the European Commission and the European Environmental Agency have financed a series of projects to assess the costs of policy inaction in the field of biodiversity protection:

- COPI, The cost of Policy Inaction: The case of not meeting the 2010 biodiversity target, EC-funded project

- Review on the economics of biodiversity loss (scoping phase) Economic Analysis and synthesis, EC-funded project

- Scaling up ecosystems services values: methodology, applicability and a case study, EEA-funded project.

Results will be presented during the COP9 meeting next 28-29 May 2008 in Germany.

The table below provides examples of the potential use of externality valuation methods to respond to risk and impact analysis needs in current EU policies: POLICYPOLICYPOLICYPOLICY Specific Specific Specific Specific demand (Quotations from original demand (Quotations from original demand (Quotations from original demand (Quotations from original

text)text)text)text) Potential uses of EEIO methods Potential uses of EEIO methods Potential uses of EEIO methods Potential uses of EEIO methods

IPP (products)

"Tools for Creating the Right Economic and Legal

Framework:

An effective IPP requires the economic and legal

framework to be conducive to greening products and to their purchase, ideally with minimum

government intervention. The Commission’s role

here is to ensure that the instruments for which it is

competent promote movement in this direction.

Policy tools that are suitable for this purpose are

[…] taxes and Subsidies. Getting the prices right through internalising environmental externalities

into the price of a product so that its environmental

impacts are accurately reflected in the price, is the

Commission’s long-term goal."

"Getting the prices right, through internalising environmental externalities into the price of a

product so that its environmental impacts are

accurately reflected in the price, is the

Commission’s long-term goal.[…]The Commission

has already made several proposals on energy-

related taxes at the European level. The 1997

proposal to restructure the Community framework

for the taxation of energy products […] will extend

the EU minimum tax rates to all energy products

and thus provide the Member States with a

more coherent framework for using energy taxation as an instrument for pursuing their environmental

and other policy objectives. The Commission will

continue to promote and encourage the use of fiscal

measures, such as environmentally-related taxes

and incentives, at the appropriate local, national or

Community level"

Environmental taxes, incentives and subsidies need to be set so that they reflect the monetary value of the extra damage caused by 1 extra unit of pollution. Environmental valuation provides an estimation of such marginal values and therefore allow market based instruments to be designed in an economic efficient manner. EXIOPOL will contribute to the estimation of a wide range of environmental costs associated with several economic sectors.

3.2.3 Ex ante policy options appraisal

We assume here that policy makers can undertake some form of action in response to important risks to ecosystems and human health. The effect of the policy intervention is to reduce the future exposure of a receptor to the risk

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concerned. We can think of the reduction in the risk as the effectiveness of the policy response, or the gross benefits of acting against risk. This is given by the estimated impact of a given environmental risk in the absence of policy actions, minus the estimated impact with adaptation. In such a management decision context, environmental valuation can be used to estimate the gross monetary benefit of a management strategy. Furthermore, the magnitude of residual impacts on selected receptors across different study areas can also be evaluated. The value of this information to decision makers is that, together with the information on the resource costs of the management strategy, it can be used to answer the following general policy question: Is the gross benefit of the management strategy greater than the cost of the strategy? In addition, this information allows the policy maker to accept or reject a single policy option, or to choose one option out of a number of possibilities.

Recent changes in EU legislation mandating some form of environmental evaluation for new policies (e.g. Environmental Impact Assessment, Strategic Impact Assessment, etc.) have increased the usefulness of valuation estimates for options appraisal, e.g. within CBA of policies. One recent example of valuations’ results used in options appraisal of recent EU policy is the CBA of the thematic strategy on air pollution. Moreover, the European Union currently uses a value of € 1 million per human life in safety CBA, generally referred to as the “1-milion-euro rule” (Despotin et al. 1998).

The table below provides examples of the potential use of externality valuation methods to respond to policy option analysis needs in current EU policies: ETAP (environmental technology)

"Getting prices right requires the systematic

internalisation of costs through market-based instruments (e.g. taxes, tax breaks, subsidies,

tradable permits and deposit-refund systems). If

properly applied they are the best way to reduce

pollution because they make producers and

consumers bear the real costs of their actions or change their behaviour in a cost-effective way.

Moreover, price distortions have been identified

as a significant barrier to environmental

technologies during the development of this

Action Plan".

Environmental valuation allows an economically efficient design of market based instruments.

EP (energy)

"The EU traditionally favours the use of

economic instruments to internalise external

costs as to allow the market to determine how to

react most efficiently and with limited costs.

More particularly, in its Communication Limiting

Climate Change to 2°C - Policy Options for the

EU and the world for 2020 and beyond, the

Commission has set out how the emissions

trading mechanism is and must remain a key

mechanism for stimulating reductions in carbon emissions and how it could be used as a basis for

international efforts to fight climate change".

(See above)

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3.3 Current trends in the application of externality valuation for policy

making

Potential uses of the economic valuation of externalities in policy making currently include:

� cost-benefit analysis (CBA) of policies or projects; � pricing policy; � design of environmental taxes (incentives, etc.); � national accounting; � as a management tool; � as a participatory exercise

CBA of projects is the traditional role of environmental valuation, and it remains the context in which stated (and revealed) preference (SP and RP) methods are most used in Europe today. However, recently, changes in EU legislation which mandate some form of environmental appraisal for new policies (e.g. Environmental Impact Assessment, Strategic Impact Assessment, etc.) have increased the usefulness of preference-based valuation methods within CBA of policies. Furthermore, in the design of pricing policies, for instance, for access to and maintenance of natural resources such as national parks, valuation may be used to elicit the demand curve for the resource and to predict the effect of pricing on behaviour. The connection here arises because SP methods involve seeking the consumer’s willingness-to-pay (WTP) for the asset. Also, certain techniques: namely, Choice Experiments, allow an estimation of the value of different attributes of the resource in question, enabling resources to be directed most efficiently to maintaining those particular assets. Valuation techniques might also be applied for designing market-based policy instruments, e.g. eco-taxes, whereby polluters are charged directly for emitting pollutants. Most of the time these environmental taxes are calculated on the basis of political factors unrelated to their optimal design from an economic point of view. Nonetheless, there is now an increasing trend towards designing taxes so that they reflect the monetary value of the extra damage caused by 1 extra unit of pollution. This represents an adherence to a general rule for tax design derived from the theory of environmental economics. Moreover, we are witnessing a growing interest in modifying the “national accounts”, i.e. the set of accounts that comprise a nation’s gross national product (GNP), by also internalising natural stocks and their depreciation due to pollution or other environmental risks1. This practice is usually referred to as “green accounting”.

All the previously discussed policy purposes might, to some extent, be addressed by research synthesis techniques: namely, meta-analysis and value transfer.

1 GNP measures the total flow of goods and services in the economy. Some of this economic activity is taken up with replacing depreciation of assets such as machinery and roads. Hence, only the net national product contributes to average well-being. By the same token, such net measures do not include any depreciation of environmental assets such as coastal zones, rivers, forests, etc. Deducting the monetary value of the damage to the natural assets from the net national product would give a better measure of the “true” level of economic activity.

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These are techniques that might be used as an alternative to preference-based methods (whenever a suitable body of literature is available) to provide monetary estimations of changes in natural stocks and environmental conditions. Compared with valuation methods, meta-analysis and value transfer are generally more appealing to policy makers since they might provide quantitative policy advice at low cost. However, the considerable research effort required for their application is relevant. The literature retrieval process and the data analysis can be extremely time-consuming, and the robustness of results is not always satisfactory. In addition, meta-analysis and value transfer rely on the body of knowledge coming from previously performed studies. Therefore, they do not allow much flexibility in the assessment process. In some cases, for instance, there might be considerable differences in the assets analysed in the literature compared with the new asset of concern, and some compromises may be required. Instead, the major value added of research synthesis comes from its ability to provide statistically robust comparisons of literature results and a systematic framework for establishing ‘true’ values of environmental goods and services.

Less well understood is the role that monetary valuation (provided with SP techniques) could play in asset management. Valuation indicates the relative strength of WTP for different features of a given asset. Hence, the asset could be managed so as to highlight and expand those features that attract the highest WTP. Finally, SP techniques involve a direct questionnaire approach that allows people to express preferences for or against environmental changes. In addition to the derivation of monetary values for the proposed changes, public participation can help to ensure that the final decision is acceptable to those who are likely to be most affected by it. Valuation also indicates gains and losses to different stakeholders, so that the likelihood for trades between gainers and losers can be identified and managed.

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4 EXIOPOL AND THE EC POLICY COMMUNITY

4.1 Introduction

One of the main objectives of EXIOPOL is to develop a tool that combines information on External costs with Environmentally Extended Input-Output (EEIO) modelling, with a view to allowing for the full cost accounting and impact assessment of different activities to bring together the physical and valuation based externality data with conventional data on the structure of an economy and environmental impacts. This tool represents a significant improvement of the state of the art since IO or EEIO models for the whole EU are currently not available at the level of sector and environmental stressor resolution covered by EXIOPOL. The tool will allow policy makers to understand better the impacts and true costs of activities in the economy via a great variety of cross-sections: by industry sector, by final consumption category, or by type of resource used, etc. It also will allow an analysis of how far social and private costs diverge at the macro level now, and how far they may diverge in the future.

The core of the project is to support cost-effectiveness and cost-benefit analysis of technologies, policies, and standard setting, at the micro and meso-macro level. This requires the coverage of a broad range of impacts and assessment of external costs. Cost-benefit analysis and cost-effectiveness analysis require in general insights in the following factors:

a) Calculation of the (net) costs that implementation of a technology, standard or policy will imply.

b) Calculation of the reduction of environmental impacts related to this implementation. The quotient of impact reduction and net costs indicates the cost-effectiveness of the measure.

c) Calculation of the (reduction of) external costs by reduction of impacts related to this measure. Information on such a reduction of external costs, and (net) investment that a measure requires, allows assessing the true societal costs and benefits.

The project will demonstrate how the approach can be used to provide important information to policy-makers, with a cluster of work (Cluster IV) dedicated to Applications for policy analysis and knowledge spillovers. Within this cluster, the results of the EXIOPOL studies will be applied to the analysis of a few selected policy questions related to major issues such as changes in production and consumption patterns for instance of food and agriculture, and radical changes in industry, including the agro-food sector and energy use patterns. This analysis will be done at a micro level (typically done with tools like externality analysis and LCA) and meso/macro a level (typically done with multisectoral models such as EEIO or CGE models). Four work streams will conduct analytical applications with: a) Evaluation of the impact of past research on external costs on policy making in the EU, b) the top down EEIO approach, c) the bottom-up approach, d)

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a comparison of the results of the two approaches b and c, showing how they can be integrated and complemented. Annex II contains a concise description of the work planned for EXIOPOL Cluster IV.

Since EXIOPOL has the ambition to build a toolbox for use by EU institutions, the consortium strives to maximise the added value to the Commission by aligning as much as possible the scope of the study in general and especially the focus of the Cluster IV policy analyses to the needs of the DGs. Therefore, the project includes a small WP that aims to:

1. Check the analysis already done on policy needs with EU officials and maybe some national relevant officials

2. Make an inventory of models in use at policy DGs that could be linked and used in combination with the EEIO and externality data to be developed in Cluster II and III.

3. Where needed, use this information for a further refinement of the EXIOPOL tools under construction.

4. Use this information to refine the selection of interesting policy relevant ‘example’ cases in the areas of resources, transport, energy, agriculture, forestry, biodiversity, industry, waste and odours in Cluster IV

5. Analyse across the Cluster II and III how coherence in the micro/macro dichotomy can be created

4.2 Policy user group

In order to facilitate said alignment activity, EXIOPOL is organising a dedicated ‘policy user group’ of representatives from different DGs including EUROSTAT at the European Commission (and possibly from national member states), as well as from the EEA. The project management will take the inputs from the user group on board wherever possible to ensure that the outcome of the project is relevant to the policy community. However, the user group will not have direct steering authority on the project; the project management reserves the right to decide to what extent such wishes and ideas can be implemented given the choices already made in the proposal, scientific logic, and other boundary conditions.

The contacted departments were invited to return comments to the EXIOPOL consortium, in particular on the following:

1. If EXIOPOL is relevant to the policy activities and analytical necessities of the department, and in particular for which policy domains and policy-relevant questions EXIOPOL can meet concrete needs

2. Any models or other quantitative tools in use in the department that could benefit from the data collection efforts done by EXIOPOL

3. Possible policy relevant example cases regarding the evaluation of impact of the past research on External Costs on policy making in EU (ws IV.1).

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4. Possible policy questions related to the upcoming work programme of the department that, in the light of sections 1 and 2 of this document, could be analysed as a part of the EXIOPOL cases studies (2009-2010), both with bottom-up (pillar I, ws IV.2) and/or top-down (pillar II, ws IV.3) methodologies.

4.3 Feedback from the Policymakers' group and implications for the

project.

4.3.1 Introduction

This section discusses the questions raised and the elements contributed by the policymakers'community in the course of the consultation process. The items are organised in three sub-sections, respectively related to:

a) Methodological aspects relevant to the general approach of EXIOPOL;

b) Considerations relevant to the implementation and maintenance of the toolbox under development, with a view to maximising the usefulness of the deliverables; and

c) Elements relevant of the selection of policy relevant applications of the tools, to be carried out in the final phase of the EXIOPOL project.

For reasons of consistency, the feedback items recived are carefully reflected in the text but not quoted in their original formulation.

4.3.2 a) Methodological aspects

a 1. EXIOPOL has the ambition to be a major advancement in the state of the art of data availability in the field of integrated economic and environmental accounting. This objective can only be fully achieved if the work programme is executed with methodologies in line with the international standards. There needs to be a close link with the ongoing work in the statistical field, which includes the activities of

• The London Group

• The United Nations Committee of Experts on Environmental-Economic Accounting (UNCEEA)

• The EUROSTAT European Strategy for Environmental Accounting (ESEA) Task Force

• The Oslo Group on Energy Statistics

A close link between the EE-IO part of the EXIOPOL project and the ongoing work in the statistical field of Environmental Accounting is ensured through a close cooperation with Eurostat. The relevant units in Eurostat (Input-Output Accounts, Environmental Accounts) are regularly up-dated

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on ongoing EE-IO related work in EXIOPOL. Representatives of the respective units are also invited to working meetings of Cluster III concerned with the development of the EE-IO framework.

a 2. It is important that the research work contributes to the development of actually applicable methods for environmental accounting; this implies inter alia that the project must be documented in a way (manuals, guidelines) that is directly accessible for the statistical offices in Member States and international organisations. The results of the research work undertaken in the EE-IO part of EXIOPOL (i.e. Cluster III) will be made fully available to Eurostat and through Eurostat’s various task forces also to national statistical offices. For instance, the ongoing work of WP’s III.2.b and III.3.b on energy accounts will be presented at the coming meeting of Eurostat’s Task Force on NAMEA in November 2008. Evidently, all EXIOPOL deliverables are accessible for Eurostat as well as national statistical authorities. This includes explicitly those EXIOPOL deliverable related to documentation of data and methodological issues in the area of environmentally extended input-output analyses.

a 3. The analysis needs to cover environment as an input as well as outputs to / damage to the environment. The EE-IO database is specified with a range of environmental extensions that cover emission of pollutants as well as resources extracted from the environment. Annex Table AIII.6 in the Definition Study DIII.1.a-5 (document available for download from FEEM site: http://www.feem-project.net/exiopol/userfiles/EXIOPOL_DIII_1_a_5_final(1).pdf) contains a comprehensive overview of the emissions and resource uses covered in the EE-IO framework. Those include (adaptations may be made in the occurrence of data gaps):

• Extraction of 16 primary crops, crop residues and fodder crops

• Extraction of biotic resources (including grazing, lumber, fish, hunting of wild animals)

• Extraction of 10 varieties of metal ores

• Extraction of 9 varieties of non-metal minerals

• Extraction of 6 types of fossil fuels

• Use of 122 energy carriers

• Arable land use, subdivided by 13 crop types

• Pasture land use

• Wood land use

• Agricultural water use, subdivided by 13 crop types, according to the UNESCO-IHE/FAO virtual water methodology. This methodology reflects the water required for crop growing, without differentiating between water sources (rainwater, irrigation)

• Emission of 6 greenhouse gases to air

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• Emission of 3 acidifying substances to air

• Emission of 2 additional local pollution precursors to air

• Emission of 2 additional ozone depleting substances to air

• Emission of 9 heavy metals to air

• Emission of particulates to air (PM 10 and PM 2.5)

• Emission of 21 organic chemicals to air

• Emission of N, P and total BOD to water

• Emission of N and P to soil

• Emission of 7 heavy metals to soil

a 4. Given the high prominence of globalisation issues in current environmental policy and research, it is important that the EXIOPOL EE-IO system is designed to look at impacts not only in the EU but also outside the EU, associated with EU consumption.

The EE-IO database is indeed set in such a way as to be fully able to track impacts throughout the supply chain across borders. Actually, one of the major objectives is precisely to analyse the global environmental pressures activated by EU consumption. This is achieved by a database design that includes all EU countries as well as 16 major trade partners of the EU and resource extraction form the rest of the world; the regions are interlinked by bilateral trade matrices that ultimately allow estimating the activity level in sector y of region s activated by demand for commodity y in region r. Environmental satellite accounts will be accordingly provided for all regions; estimations of external costs will be provided in terms of marginal values. The inter-country transferability of marginal values using benefit transfer techniques will be assessed.

a 5. The project shall be fully transparent about the various external costs included, as the user will need to be aware of what is not included, as well as what is included and somehow try to widen the analysis. The analysis of externalities should in fact cover a sufficiently broad scope of impacts, viz, value health impacts as well as impact on the environment. A distinction shall also be made between costs which are actually paid on a market (e.g. costs for medical treatment due to pollution or costs for insulation against noise), profits not made (e.g. less crop yield due to high ozone concentrations or lower rents for flats because it is situated in a noisy residential area), and non-market values revealed by contingent valuation. It will also be important to to show who bears the occurring external costs: private households or the public sector, business, the economy/society as a whole.

For each sector under analysis (agriculture, industry, waste, odour, forestry, etc), the external costs will be firstly qualified. Secondly, the quantification of costs using ad hoc valuation methodologies will be performed for those costs for which reliable estimation are not yet available in the economic

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literature. In this sense market and non-market dimensions will be fully screened.

Note that a dedicated meeting focussing on the methodological aspects related to the integration of externality valuations with the EE-IO framework will be held in September 2008, appended to the first Advisory Board meeting.

4.3.3 b) Implementation and maintainability of the tool

b 1. Timeliness of data dissemination. The full EXIOPOL EE-IO database will be for the base year 2000, with an extrapolation to the year 2005 (see below). Different options have been evaluated at length by the research team, converging on the adoption of the year 2000 for reasons of availability of the necessary source data (mainly, input-output accounts). Although this is well in line with the data that are normally used with applied economic models, it is acknowledged that, in order to be policy relevant, the analysis needs to be related to a year as recent as possible. Also, the full EXIOPOL database is for a single point in time, whereas a number of additional powerful applications would be accessible if one had available time series of EE-IO accounts (see section 1.1/3/).

This opens questions about the future of EXIOPOL after project closure, about foreseeable extensions and updates, about the protocols for maintenance and their cost. The research team takes into account from the start the possibility to update the data in order to generate trends. These activities fall in the workpackage dealing with the institutional embedment of the project results. Although the activities of this WP will formally start after the first database prototype is completed, the primary data sources are already being collected as far as possible in time series, and will be documented extensively so as to facilitate later up-dates. Taking into account the considerations above, the consortium has also decided to endeavour an extrapolation of the EE-IO database to the year 2005.

The research project shall take into account, in the context of updating, the increasing availability of primary data sources, including the ESTAT/EEA/JRC Data Centres (Natural Resources, Products, Waste..) as well as the generation (and increasing availability) of data on chemicals due to REACH. In particular, information of properties of chemicals (i.e. presumably, more substance becoming classified as dangerous - for purposes of the ESTAT indicator on production/consumption of toxic chemicals) as well as and information on risks related to exposures to these chemicals. Contacts have been established with the related ESTAT project manager and the leader of the research consortium working for ESTAT on these issues.

Further information concerning the database maintenance and further development will be disseminated to the policymakers' community in the course of the project execution.

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b 2. The EE-IO database will have to be as much as possible accessible to those who carry out modelling exercises in the commission and to the modelling community in general. This can in principle be obtained in a number of ways; a basic requirement is however to make the dataset compatible with the databases commonly used in ordinary modelling environments. For CGE models, this hints for instance at achieving as much as possible compatibility with the GTAP database, as GTAP is used by the majority of them. Tools will be provided for the user to be able to manipulate the data into the relevant format (this has now become a major work item in the revised detailed work description for months 12-30 after the first interim evaluation of the project)

b 3. In the context of water policy, most relevant is the project Aquamoney which is developing best practice guidance for the valuation (in terms of original valuation and benefits transfer) for the purposes of the Water Framework Directive. However, some on the interim deliverables, particularly with regard to issues associated with benefits transfer would be relevant for this project now (www.aquamoney.org) but unfortunately these will not finally reported until 2009. There is a need to ensure that EXIOPOL involves the relevant valuation experts in its work given that this is a highly specialised area of continuing development within the academic community. The basis for cross-fertilisation of the projects rests with a number of partners involved in both.

b 4. It has been suggested that a project of the size of EXIOPOL could deliver a basic applied model that makes full use of the database generated. This wish is somewhat at odds, however, with the general strategy that was agreed at negotiation phase of the EXIOPOL project, when it was agreed that EXIOPOL would be specifically focussed on data generation activities and that it would only endeavour linkages with existing models (viz. WTM, CEPAM as well as relevant sectoral models in the areas of agriculture, energy and transport) and not the development of new models which would absorb excessive resources in a project largely concerned with advancing the state of the art of data availability.

4.3.4 c) Potential case studies

c 1. In general, the timing of the project should fit well with a number of reviews, including the Water Framework Directive, the Air Quality Directive, and the Resources Strategy. The exact potential contributions will need to be assessed nearer the time when the EXIOPOL cases studies will be actually conducted. For this reason, the consultation process is not to be considered as concluded with the delivery of the present document but will continue through the ongoing information of the policymakers' community and the circulation of milestones papers.

c 2. Potential importance of EXIOPOL in supporting regulatory decisions in the field of chemicals risk management. The REACH regulation entered into force last year and its two relevant titles concerning restrictions on marketing and use and authorisations of dangerous chemicals enter into

25

force in 2009 and 2008 respectively. Restrictions and authorisations decisions are required to take account of socio-economic considerations. Relevant REACH provisions are as follows:

- concerning authorisations: "[For certain substances of very high concern] an authorisation may only be granted if it is shown that socio-economic benefits outweigh the risk to human health or the environment arising from the use of the substance and if there are no suitable alternative substances or technologies."

- concerning restrictions: "[T]he net benefits to human health and the environment of the proposed restriction may be compared to its net costs to manufacturers, importers, downstream users, distributors, consumers and society as a whole."

As one of the possible ways of fulfilling the abovementioned requirements is the cost-benefit analysis, a collection of estimates of sector/substance/impact-specific estimates of external costs could importantly support the relevant analysis and regulatory decisions.

One potentially useful example is the study commissioned by DG Environment from DHI Water and Environment "The impact of REACH on the environment and human health". The substances-specific case studies can give some indications for an appraisal of environmental benefits in the context of REACH SEA. The study is available at: http://ec.europa.eu/environment/chemicals/reach/background/docs/impact_on_environment_report.pdf

Two other interesting examples are studies ordered by the UK Defra (Department for Environment, Food and Rural Affairs) which also contain substance specific case studies as well as policy recommendations: "The benefits of chemicals regulation" (draft) and "New Approaches to Evaluating and Quantifying the Benefits of Chemicals Regulation".

On the issue of externalities, it is considered important to include in the scope of externalities to be valued not only the ones related to emissions to environmental compartments but also the human health effects related to the exposure to dangerous chemicals at workplace and through consumer products. This can be relevant to the foreseen plastic/chemicals case study of WP II.5.1 “industry externality”, that will provide an analysis of the environmental and non-environmental externalities of the manufacturing industry.

c 3. Potential importance of EXIOPOL in supporting regulatory decisions in the field of water policy. EE-IO analysis can inform a range of activities of the DG ENV unit Unit D.2 "Protection of Water & Marine environment", that include the implementation of water policy - preparation of new water policy and assessment of existing legislation, as well as in the implementation of legislation like the Water Framework Directive (2000/60/EC), chemical pollution of surface waters (regular reviews of priority substances foreseen by the Water Framework Directive) and work on water scarcity and droughts. The same unit is also currently leading a task force on climate change adaptation, preparing a white paper on the theme.

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Specific inputs on water policy may be provided by Work Stream II.2 Externalities of different types of agricultural practice (excl. biodiversity), that will develop and adapt the impact-pathway methodology to the environmental fate of nutrients and pesticides as well as the exposure/impact chain methodology. This will be done by looking at chemicals' dispersion paths in water resources too. Water scarcity and droughts are not directly addressed by EXIOPOL. More in detail, further and ongoing contact will need to be kept in order to identify specific policy questions related to the upcoming work programme of the department that could be analysed as a part of the EXIOPOL cases studies. The actual potential application field must be carefully identified in the light, inter alia, of the water-related data coverage; the availability of economy-wide water pollution data is in fact very modest compared to that of air emissions and poses serious problems for the compilation of reliable water emissions accounts, other than nutrients, for use in EE-IO applications. From the angle of externality research, EXIOPOL is not addressing water pollution in particular, since this field of literature on externality valuation is already well developed.

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5 CONCLUSIONS

This short report illustrates the exercise that has been done in the EXIOPOL workpackage I.1.a with a view to aligning as much as possible the scope of the research to the needs of the policy community. Two main activities were undertaken to this end. Firstly, a review of the potential applications of externality research and of EE-IO to inform the scientific foundations of policymaking, and an analysis of the possible relations with the information needs laid down in a number of specific policy documents; and, secondly, a consultation with the EC Services to test the extent to which the planned work programme of the project meets the actual needs and to take on board as much as possible the elements proposed by the policymakers' community.

In sections 2 and 3, three main fields of application for EE-IO and two broad categories for externality research have been identified ad described: environmental problem analysis, retrospective analysis and prospective impact analysis for EE-IO and assessment of risks and ex-ante policy options appraisal for externality research. Current trends in policy-relevant applications of this research have been outlined.

Section 4 gives an account of the main factors emerged from the consultation with the Services, organised in the three categories –methodological aspects, issues of implementation and maintainability, and potential case studies- and briefly discusses how they will be taken into account in the project. A close link between EXIOPOL and the ongoing work in the Environmental Accounting field will be facilitated through a close cooperation with several working parties, while the applicability of the methods developed will be ensured through openness of dissemination and comprehensive dissemination. The concerns expressed in regard to the timeliness of data dissemination and to the costs of data updating have been taken on board in the collection of time series of source data whenever available, and in the foreseeing of an extrapolation of the database to the year 2005 (main database founded on the year 2000)

With regard to the selection of case studies to be undertaken, a number of policy dossiers have been indentified where contributions from the EXIOPOL research could be envisaged. However, the exact potential contributions will need to be assessed nearer the time when the EXIOPOL cases studies will be actually conducted. For this reason, the consultation process is not to be considered as concluded with the delivery of the present document but will continue through the ongoing information of the policymakers' community and the circulation of milestones papers.

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Annex I: TARGET AUDIENCE (USER GROUP)

An initial screening of the activities of the policy directorates of the European Commission has been made by JRC-IPTS based on experience and past and ongoing collaboration with the Services. As a rule of thumb, it has been considered that the EXIOPOL activities have direct relevance to the sectoral themes Agriculture, Environment, Energy and Industry and to the horizontal themes Taxation and Impact Assessment. The Directorates and individual units identified by this first screening are listed below along with the hierarchical contact (Director or Head of Unit or official responsible for specific programmes when information was available). Although the list has been updated until the second week of July 2008 to try keep abreast of the continuous changes in the organigramme, some of the contents may be obsolete:

DG AGRI:

• Directorate L: Economic analysis, perspectives and evaluations (John Bensted Smith, adviser for SD: Notis Lebessis)

• L.2: Economic analyses of EU agriculture (Pierre Bascou)

• L.4: Evaluation of policy measures in agriculture, studies (Leo Maier)

DG ECFIN:

• ECFIN-A: Economic studies and Research (Istvan Pal Szekely)

• ECFIN-A-2: Economic databases and statistical coordination (Frank Schönborn)

• ECFIN-A-5: Economic studies and research activities (Kristine Vlagsma)

• ECFIN-E: Structural reforms and Lisbon Strategy. Economic evaluation (Gert-Jan Koopman)

• ECFIN-E-2: Product markets, competitiveness and innovation policies (Fabienne Ilkovitz/ Adriaan Dierx)

• ECFIN-E-4: Economic analysis and impact assessment of Community policies and the Sustainable Development Strategy (Nathalie Darnaut, dep. Mark Hayden)

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DG TREN:

• A-1: Economic analysis, impact assessment, evaluation & climate change (S. Santamato)

• A-2: International market and competition (J. L. Colson)

• A-4: Clean transport & urban transport (E. KOPANEZOU)

• Directorate D: New and renewable sources of energy, energy efficiency & innovation (acting, F. BARBASO)

• D-1 Regulatory policy & Promotion of renewable energy (H. van Steen)

DG ENTR:

• Directorate B: Industrial policy and economic reform (John Farnell, acting)

• B-4: Economic analysis and evaluation (Andrzej Rudka)

• B-4: Sustainable development, Climate change and competitiveness (Michel Catinat)

• B-5: Impact Assessment and Administrative Burden Reduction Programme (Geneviève PONS-DELADRIERE)

• Directorate F: Consumer goods (Georgette Lalis)

• Directorate G: Chemicals, metals, forest based and textile industries (Patrick Hennessy)

DG ENV:

• Directorate C: Climate change & Air (Jos Delbeke)

• C-3: Clean air & transport (Stefan MOSER

• C-4: Industrial emissions & Protection of the Ozone layer (Marianne Wenning, Thomas Verheye DHoU)

• C-5: Energy & Environment (Piotr Tulej, Stefan Vergote DHoU)

• Directorate D: Water, Chemicals & Cohesion (Peter Gammeltoft)

• D-1: Chemicals (Astrid Schomaker), Peter KORYTAR and Sebastian GIL for REACH related issues

• D-2: Protection of Water & Marine environment (Peter Gammeltoft, Helmut Bloech DHoU). Maria BRATTEMARK as official responsible for the Water Framework Directive

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• D-3: Coehesion policy and Environmental Impact Assessment (George Kremlis)

• Directorate G: Sustainable Development & Integration (Timo Makela)

• G-1: Sustainable Development & Economic Analysis (Robin Miege, Manfred Rosenstock, DHoU)

• G-2: Environment & Industry (Pavel MISIGA, Gilles Vincent DHoU)

• G-3: Research, Science & Innovation (Ian CLARK)

• G-4: Sustainable Production & Consumption (Klaus Koegler, Rosalinde van der Vlies DHoU)

DG TAXUD:

• Unit D2: Excise duties and transport, environment and energy taxes (Thomas Carroll)

DG MARKT

• B-2: Impact assessment, Evaluation and Economic Analysis (Werner Stengg)

DG SANCO

• C: Public health and Risk Assessment (A. Rys)

DG REGIO

• C-1: Conception, forward studies, impact assessment (P. Berkowitz)

• C-3: Economic and quantitative analysis, additionality (Nicola De Michelis)

• C-4: Evaluation (V. Gaffey)

COMMISSION DISCUSSION FORUMS AND WORKING PARTIES:

• ECONOMSITS' NETWORK (Coordination: Cavan O'Connor-Close, ENTR B)

• IMPACT ASSESSMENT WORKING GROUP (Coordination: Detlev Clemens, SG)

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• Interest group in DG ENV (Stephen White)

Additional non-policy directorates and agencies:

DG ESTAT:

• Directorate C: National and European Accounts (Mr. Norlund)

• C2: National accounts- Production (Mr. Barcellan, Mr. Ritzmann as member of EXIOPOL advisory board)

• E3: Environmental Statistics (Mr. Decand, Mr. Cabeça for NAMEA)

European Environment Agency

• Strategic knowledge and innovation programme (Mr. David Stanners , Head of programme)

• Sustainable consumption and production group (Mr. Lars Mortensen, Head of group, with copy to Mr. Pawel Kazmierczyk, Project manager - Material flows)

• Spatial analysis group (Mr. Ronan Uhel, Head of group)