Scottish Government

2. High-level carbon assessment of 2010-11 Draft Budget

29. The carbon assessment of the Budget takes into account the inter-industry relationships of the Scottish economy and the carbon intensity of production in the different sectors. Portfolio and industry analyses help us understand the impacts and sources of expenditure-related emissions.

30. The following sections provide a description of the method and portfolio-level results. Results for individual spending lines are presented in Annex 2.

2.1. Method

31. For this assessment, the Input-Output model estimates all changes in industrial production required to meet the final demands for goods and services as a result of central Government spending as planned in the Draft Budget. The Input-Output ( IO) model takes into account the inter-industry relations of an economy and quantifies the effect of changes in one sector on all others. In this way it is possible to estimate all of the production changes that take place in response to output changes required to meet Government spending. For example, spending on "Motorways & Trunk Roads Structural Repairs" is associated with the outputs of the construction industry, which requires as inputs the use of fuel oil, machinery, raw materials and consumption of electricity.

32. The lowest level of spending detail available is used to attribute planned Budget spend to the IO model industry categories. Each spending line is attributed to one of 126 industry sectors within the IO model ⁹ depending on where the money is to be spent. Lastly, these spending lines are summed to the Level 3 groups that are reported on in the Draft Budget as well as to Level 2 and portfolio level.

33. Individual expenditures generate direct output changes in the industry that is assumed to receive the money. Within the model, industry can mean anything from private agriculture, manufacturing industries and financial institutions through to public administration.

34. The IO model estimates all the indirect output changes; these will be the output changes in industries supplying those industries providing goods and services directly to government.

35. The model also estimates the extra incomes in terms of wages and salaries of households that are generated as a result of the direct and indirect output changes. From these estimates it is possible to calculate further output changes that are required to meet the consumer demand when this household income is spent within the economy. These are the induced effects. Annex 4 shows a flow diagram of the method used.

36. The greenhouse gas component of the air accounts in the UK environmental accounts shows emissions by different types of industry and, together with information on the value of industry outputs, it is possible to estimate average emissions for every unit of output. All of the direct, indirect and induced output changes can then be expressed in terms of carbon by applying industry-level greenhouse gas-to-output ratios.

37. As a trading economy Scotland imports a significant proportion of its goods and services (as well as exporting other goods and services to the rest of the world) so it is important that the consequences of these imports are taken into account in the analysis for a consumption-based assessment approach. Therefore, the analysis has been run using two different IO models. A Scottish model, based on the Scottish IO tables, has been used to estimate the domestic emissions. A UKIO model, where imports are not removed from the underlying data tables, has been used as a proxy to derive imported emissions.

38. The estimates therefore assume that the emissions associated with imported goods and services are produced as though they were all produced in the UK economy (using the same processes and carbon intensities). This is appropriate because not only is trade with the rest of the UK significant, but also there is currently no comprehensive individual country IO coverage available within the UK to disaggregate the emission impacts of trade any further.

2.2. Portfolio expenditure and associated emissions

39. Total estimated emissions attributable to the 2010-11 Draft Budget ¹⁰ are 11.5 MtCO ₂-equivalent. The table below shows overall spend and emissions by the individual portfolios and further whether these emissions arise directly, indirectly or are induced. Emissions are almost directly proportional to spend. Health and Wellbeing as well as Local Government as the largest Budget items therefore show the highest emissions.

40. Expenditure is shown net of income, in line with the Draft Budget, and emissions are calculated on the same basis but current systems mean it is not possible to produce an emissions figure based on gross expenditure. See Annex 2 for a fuller discussion of this issue.

Table 2: Portfolio expenditure (excluding non-cash items) and emissions

41. Direct emissions account for 21 per cent of the total; indirect emissions (including imported) for a further 51 per cent - a large proportion of which are caused by energy generation. The balance of 28 per cent is the amount of emissions induced by domestic spending arising from the higher incomes generated through Government spending (wages and salaries for Government employees and private sector employees working in industries that supply government).

42. Figure 1 demonstrates graphically the results for individual portfolios and the split by type of emissions (direct/indirect/induced) and also whether the emissions are domestic or imported. As the graph highlights, the emissions intensity of individual portfolios (i.e. carbon emissions per pound spent) is broadly similar. The exception is Rural and Environment Affairs where a large part of expenditure is linked to carbon-intensive production methods (see next section). As the inputs that flow into the portfolio outputs have a great deal in common, re-profiling spending from one portfolio to another is unlikely to result in a great change in overall emissions attributable to the goods and services funded by the Scottish Government.

43. The Budget provides financial detail at three levels of detail: at portfolio level (Level 1) and spending Levels 2 and 3. A one-to-one relationship between spending line and IO industry has been established at the lowest level of detail. All higher-level lines (i.e. Levels 1, 2 and 3) reflect the industrial split of the lower level of detail that they encompass (for the corresponding carbon estimates see Annex 2).

44. The large transfers to Local Authorities (Revenue Support Grant, Non-Domestic Rates) are allocated to different industries using information on final demand by Local Authorities in the IO tables, rather than allocating the lines in their totality to the 'Public Administration' IO category.

Figure 1: Estimated domestic and imported GHG emissions (thousands of tonnes of CO ₂ equivalent) by portfolio and generating industry.
Scottish Government Draft Budget 2010/11

2.3. Emissions by industry source

45. The analysis in Figure 1 confirms the overwhelming importance of domestic energy production and emissions in the carbon share of the Scottish Budget. This overall picture applies to individual portfolios with the exception of Rural Affairs and Environment. The Rural Affairs and Environment ( RAE) portfolio shows a higher carbon intensity because much of its expenditure supports farming activity, which produces a lot of methane and nitrous oxide per unit of output and these gases have a much greater warming impact than carbon dioxide, the main greenhouse gas generated by the spending of other portfolios. The carbon intensity of agriculture is relatively large compared to most industries (see Annex 4 for a full industry breakdown). Also, agricultural emissions in this portfolio dominate to a greater extent than any other industrial sector in other portfolios.

46. As highlighted above (Section 1.5), the methodology is unable to capture the carbon impact of the outcomes of spend. Carbon sequestration (i.e. the absorption and storage of carbon in, for example, trees and peat) is consequently not included in the estimate of the carbon intensity of the agricultural sector; it is categorised as a consequence of land-use change and cannot currently be linked to the output of the forestry industry, which consists of harvested wood rather than the planting of new forests. The impacts from such activity can, however, be picked up as a part of an assessment process that considers individual policies and programmes.

47. The overall carbon footprint for the RAE portfolio does not include the emissions relating to spending financed by EU funds either. As explained in Section 2.2 this is because the Draft Budget shows net expenditure, i.e. expenditure that is not funded through sources of income like EU funds.

48. Total emissions broken down by industry are shown in Figure 2. Some 29 per cent of the Scottish Government's carbon footprint is caused by the use of energy, followed by manufacturing (17 per cent) and transport (14 per cent).

Figure 2: Overall Government spending - Industry sector share of emissions
(domestic direct, indirect and induced, plus imported GHG emissions)

49. Figure 2 demonstrates that to reduce the emissions impact of Government spending, de-carbonisation of the electricity sector is a key measure. As the electricity sector is being decarbonised, the carbon intensity of the sector in the IO tables falls, with a consequential reduction in the carbon emissions recorded in the HLA calculation for the use of electricity. ¹¹

2.4. Direct, indirect, induced, domestic and imported emissions

50. When calculating the emissions total of Budget and portfolio spending lines, different boundaries may be set. Both direct (for example, emissions occurring as a consequence of the direct combustion of fuels for space heating) and indirect (for example, through the use of electricity, which creates carbon emissions in its generation) effects have been attributed to Budget spending. These emissions would not occur if the funds were not spent. ¹²

51. In addition to domestic emissions, the HLA takes into account the emissions generated outside of Scotland in the production of imported goods purchased as a result of Government spending (e.g. fruit imports for induced household spending, or imported computers as indirect effect of Government expenditure).

52. The emissions split between domestic and imported goods shows clear differences (see Figure 3). Imported emissions contain a larger share of manufacturing and transport reflecting the fact that much of Scotland's demand for manufactured goods is met through imports. Energy accounts for the largest share of domestic emissions because residents' energy demand can only be met locally.

53. The Scottish Budget creates private incomes (both in the public sector and in the private industries whose goods and services are demanded by Government). The Scottish Budget thus induces demand and further economic output, which generates carbon emissions. From a macro-economic perspective it is correct to link induced output and carbon emissions growth to the initial, direct demand impulse caused by Government spending. For this assessment, domestic induced effects have been attributed to the Scottish Budget.

54. Induced effects in other countries, although in principle caused by the same direct demand impulse, are not included in the total. This is in line with the general practice for calculating national carbon footprints, where only direct and indirect effects and no cross-border induced effects are taken into consideration. This approach is intended to generate an estimate that can be compared to the total Scottish carbon footprint.

Figure 3: Domestic and Imported Emissions - All portfolios

2.5. Individual-level assessments (Carbon appraisals)

55. The carbon assessment presented in the Budget is a summary measure of the carbon impact of Scottish Government spending and can be used to understand the relative impact of total and portfolio spend on Scottish emissions and the key sources of those emissions. To track, evaluate and understand the impact of the Government's carbon reduction actions and policies on Scottish total emissions, including 'use' impacts, other tools are more appropriate.

56. The carbon appraisal of individual policies is an important part of carbon management. Appraisals allow the identification and quantification of the abatement potential of different measures aimed at tackling climate change in an objective, consistent and evidence-based approach, as well as identifying effective and efficient ways of minimising the carbon impact of other policies and interventions.

57. A carbon appraisal looks in detail at the effects of policy measures on carbon emissions, both direct and indirect, in order to capture the consequences of a particular proposal, both positive and negative. Such individual-level assessments of policies are also able to pick up effects (for example, leakage effects of transferring carbon-intensive industries abroad) which are not captured by the HLA.

58. The outputs of an appraisal include the estimated emission reductions/increases of sectors within the EU Emissions Trading Scheme ( EU- ETS) and those in non- ETS sectors, changes in the net carbon account, cost-effectiveness of the policy per tonne of CO ₂-equivalent, impacts on public finances and security of energy supply, etc. It complements the general cost-benefit analysis described in the Treasury 'Green Book'. ¹³

59. The Department for Energy and Climate Change have produced guidance ¹⁴ for use in undertaking appraisals. As part of the overall Carbon Assessment Project, this guidance has been assessed for its appropriateness in Scotland, testing its suitability for Scottish Government needs and identifying ways to improve on its accuracy and coverage for use in Scottish appraisals. We are now considering how best to incorporate this into the appraisal process.

60. Individual-level assessments will be able to demonstrate the extent of any emissions savings (or increase in emissions) across the wider Scottish economy and thus inform future annual assessments of performance in relation to the reduction pathway set out in the climate change legislation.

2.6. Carbon assessments and uses

61. Given the methodology used, the HLA provides, in the first instance, a snapshot of the carbon impact of the Scottish Budget. The table below gives an overview of the suitability of the HLA and the more detailed, individual-level assessments of the Budget for different purposes, from more static, reporting functions to policy evaluation and assessment.

Table 3: Suitability of the two assessment types for different uses

62. It is apparent that the strength of the HLA tool lies in giving an overview of the carbon consequences of the output changes that are caused by Government spending and putting expenditure-related emissions into a larger context. It also provides a tool for creating greater awareness within and outside the public sector of the carbon consequences or 'costs' of our actions in order to motivate less carbon-intensive cultures and behaviours and help embed a consideration of carbon within decision-making processes. For detailed assessments of the carbon impact of specific policies, carbon appraisals are more appropriate.