DISCUSSION PAPERS IN ECONOMICS

Transcription

1 Alabi, Oluwafisayo and Munday, Max and Swales, Kim and Turner, Karen (2016) Physical water use and water sector activity in environmental inut-outut analysis. Discussion aer. University of Strathclyde, Glasgow., This version is available at htts://strathrints.strath.ac.uk/60455/ Strathrints is designed to allow users to access the research outut of the University of Strathclyde. Unless otherwise exlicitly stated on the manuscrit, Coyright and Moral Rights for the aers on this site are retained by the individual authors and/or other coyright owners. Please check the manuscrit for details of any other licences that may have been alied. You may not engage in further distribution of the material for any rofitmaking activities or any commercial gain. You may freely distribute both the url (htts://strathrints.strath.ac.uk/) and the content of this aer for research or rivate study, educational, or not-for-rofit uroses without rior ermission or charge. Any corresondence concerning this service should be sent to the Strathrints administrator: The Strathrints institutional reository (htts://strathrints.strath.ac.uk) is a digital archive of University of Strathclyde research oututs. It has been develoed to disseminate oen access research oututs, exose data about those oututs, and enable the management and ersistent access to Strathclyde's intellectual outut.

2 STRATHCLYDE DISCUSSION PAPERS IN ECONOMICS PHYSICAL WATER USE AND WATER SECTOR ACTIVITY IN ENVIRONMENTAL INPUT-OUTPUT ANALYSIS BY OLUWAFISAYO ALABI, MAX MUNDAY, KIM SWALES AND KAREN TURNER NO DEPARTMENT OF ECONOMICS UNIVERSITY OF STRATHCLYDE GLASGOW

3 Physical Water Use and Water Sector Activity in Environmental Inut-Outut Analysis Alabi, Oluwafisayo a,d, Munday, Max b, Swales, Kim c and Turner, Karen d a Deartment of Economics, University of Strathclyde, Glasgow, UK, b Welsh Economy Research Unit (WERU) Cardiff University, UK c Fraser of Allander Institute (FAI), Deartment of Economics, University of Strathclyde, Glasgow, UK d Centre for Energy Policy (CEP), University of Strathclyde, Glasgow, UK oluwafisayo.alabi@strath.ac.uk; MundayMC@cardiff.ac.uk; j.k.swales@strath.ac.uk; karen.turner@strath.ac.uk

4 Abstract This aer uses inut-outut accounting methods to identify the direct, indirect and induced hysical demand for water. Previously the seminal work by Leontief (1970) has been emloyed to motivate a fuller account of issues related to sectors that generate and sectors that clean/treat olluting oututs (Allan et al 2007). The resent aer extends this aroach to deal with sectors that use a natural resource and the sector(s) that suly it. We focus on the case of water use and suly and a case study for the Welsh regional economy. The analysis shows how the roosed method, using both the quantity inutoutut model and the associated rice dual, can be used to consider economy wide imlications of the deviation between actual exenditure on the outut of the water sector and actual hysical water use. The rice aid er hysical amount of water aears to vary greatly amongst different uses. This may occur for various reasons. We argue that such analysis and information is essential for olicy makers and regulators in understanding the demands on and suly of UK regional water resources, their role in suorting economic exansion, and can ultimately inform water sustainability objectives and strategies. Key words: Water resources; Full Leontief environmental model; Inut-outut; Multiliers; Wales

5 1. Introduction Water olicies and regulations across the EU (including the water framework directive WFD) (EU, 2000) rovide legislation for lanning and delivering better water environmental management (Euroean Commission, 2011). DEFRA (2011) outlines the UK s obligations to deliver under the WFD and also rovides wider context in terms of the uneven geograhical distribution of water resources and different levels of stress on the resources. The UK s water-stressed regions tend to be more densely oulated. Therefore, future water demands might involve unsustainable water abstraction levels and water stress in resource abundant regions in order to meet increased demand from more heavily oulated areas. Water comanies and regulators therefore face the challenge of comrehending the comlex economic interactions determining water use and the sustainability of water suly (Euroean Agency, 2015). In articular, there is a need to areciate the economy-wide imlications of future industry develoment and how water use in one industry connects to the embedded water use in suly chains. This aer investigates the way in which inut-outut accounting methods can be used to imrove our understanding of the direct, indirect and induced demand for a hysical resource such as water. Conventional environmental inut-outut modelling attemts to cature emissions generation, or hysical resource use, associated with economic activity. It does so by linking aroriate direct hysical use/outut coefficients to standard (economic) inut-outut multilier results. Previously the seminal work by Leontief (1970) has been emloyed to motivate a fuller account of issues related to sectors that generate and sectors that clean/treat olluting oututs (Allan et al. 2007). Secifically, it considers the resource costs imlied by internalising that level of externality that cannot be tolerated, and who bears them. The resent aer extends this aroach to deal with sectors that use a natural resource and the sector(s) that suly it, focusing on water and considering the resource costs of collecting, rearing and moving water to different tyes of user. The aer uses the Welsh Inut-Outut Tables, together with data from the UK Environmental Accounts to construct three alternative water multilier measures for Wales based around both hysical and resource use methods. These roduce quantitative results that differ, sometimes quite radically. The investigation of these differences is imortant for both olicy and analysis. In this resect the analysis builds on, and extends, the earlier work of Weisz and Duchin (2006).

6 The remainder of the aer is structured as follows. Section 2 reviews early develoments in environmental inut-outut modelling. Section 3 gives a ste by ste account of how insights from the Leontief (1970) general model can be alied to the demand for, and the suly of, a hysical resource like water. Section 4 describes the data used in this alication and the derivation of adjusted inut-outut rows that reflect the differences between ayments actually made to the water sector and those imlied by actual water use. Section 5 outlines the main findings of the analysis, focussing on the imlications of these findings for the analysis of water resources within an inut-outut framework and for olicymakers. 2. Water Resources and Inut-Outut Framework The initial alication of inut-outut analysis to the interaction between the economy and the environment dates back to the 1960s and 1970s. Early models focused on constructing what Miller and Blair (2009) refer to as fully integrated models (Daly, 1968; Isard, 1969). These studies attemted to model both the environmental and economic system in a manner consistent with the Material Balance Princile (MBP). In this aroach, flows within and between the economy and the environment oerate along the same lines as interregional trade in an inter-regional IO model. However, these all-encomassing economyenvironment models were difficult to oerationalise. A second aroach is based on the work of Leontief (1970) which discusses the construction of a generalised inut-outut model that links ollution generation directly to economic activity and associated cleaning behaviours (Miller and Blair, 2009). This aroach augments the conventional (economic) inut-outut technical coefficients matrix with additional rows and columns to reflect ollution generation and abatement activities by economic sectors. The underlying rincile of the Leontief (1970) model identifies ollution as a by-roduct of economic activities. This is articularly aroriate for ollutants whose cost is not internalised by the olluter. Once categorised as a negative externality, ollution can then be reduced through the oeration of abatement sectors whose activity is at least artly endogenously determined. More recent alications of environmental inut-outut models tyically adot an inutoutut aroach that is influenced by both the Leontief generalised and limited economic-

7 ecologic models (see Victor, 1972). They only consider the one-way link between the economy and the subsequent environmental or resource use imlications but do not exlicitly incororate endogenous cleaning sectors and ecological inuts from the environment. In this aer we refer to this as the conventional environmental inut-outut aroach. This method emloys both the regular inut-outut Leontief inverse and a corresonding vector of direct hysical ollutant (or resource use)/outut ratios. It has been commonly alied for allocating resonsibility for ollution generation embodied in trade flows, using multiregional, interregional and international inut-outut frameworks (Wiedmann, 2009; Wiedmann et al., 2007). Other alications address natural/hysical resource concerns (Lange, 1998) This conventional environmental modelling aroach has also been used to consider secific issues around water scarcity and trade (see, for examle, Duarte and Yang, 2011). Dietzenbacher and Velázquez (2007) introduce the concet of virtual water to the inutoutut literature in considering whether water scarce/abundant regions are likely to be net imorters/exorters of water. 1 Other authors emloy a multi-sectoral attribution to consider water allocation roblems in and between regions facing acute water scarcity (Carter and Ireri, 1968; Feng et al. 2007; Guan and Hubacek, 2007; Seung et al. 1997). In this vein Velázquez (2006) develoed an inut-outut model of industrial water consumtion for Andalusia. This aroach ermits analysis of the direct and indirect consumtion of scarce water resources allowing the otential for an economic and environmental olicy oriented towards water saving. Environmental inut-outut has also rovided a framework for consumtion accounting methods for dealing with water use and the estimation of national water footrints (Cazcarro, et al., 2010; Chaagain et al., 2006; Hoekstra and Chaagain, 2007; Yu et al., 2010). Using an illustrative aroach, Zhang et al. (2010) show that Chinese water scarcity issues relate to a disconnect between the geograhical distributions of water resources, economic develoment and other rimary factors of roduction. This results in a searation of roduction and consumtion of water-intensive roducts. These authors use a multiregional inut-outut (MRIO) framework to estimate the nature of virtual water trade and consumtion-based water footrints (see also Okadera et al., 2015). Similarly, White et al. 1 The concet of virtual water is the water use embedded, directly or indirectly, in the roduction of a good or service.

8 (2015) emloyed an integrated MRIO hydro-economic model to examine a consumtionbased water footrint and the embedded water flows in inter-regional trade in China. They show that whilst there might be value in increasing imorts of virtual water from water rich regions, care is needed because this could result in greater water stress in other waterscarce regions. However, these develoments neglect crucial asects of the Leontief generalised model aroach. These are the internalisation of the negative ollution imacts and the associated endogenous cleaning activities. There is limited work attemting to aly, discuss and exlore the full Leontief (1970) environmental inut-outut model (Allan et al., 2007; Leontief and Ford, 1972). The Leontief generalised model aroach can be usefully alied to water use. It identifies the economic resources emloyed in the collection, rearation and movement of water. 2 Two secific insights from the oeration of the full environmental model rove to be articularly relevant in this case. First, the resources used in the water suly sector can act as an alternative index of water use. Second, differences between the water use multilier values generated by the conventional environmental and the full Leontief generalised aroach identify imortant issues for environmental inut-outut analysis in articular, but also for inut-outut analysis as a whole. 3. Method Tracking water use through the conventional environmental inut-outut aroach, roceeds in the following way. Sectorally disaggregated outut in an economy with n sectors can be reresented as (Miller and Blair, 2009): [ ] 1 q = I A f (1) In equation (1), q and f are resectively the (n x 1) outut and final demand vectors, where the i th element in each resectively is the outut and final demand for the roduct or service generated by sector i. A is the (n x n) matrix of technical coefficients, where element, aij, 2 The basic inut-outut water sector can be thought of as identifying that art of the combined human-environmental rocess that recycles waste water to usable water.

9 is the value inut of sector i directly required to roduce one unit of the value outut of sector j. The [ ] 1 I matrix is the Leontief inverse. Each element, α i, j, gives the outut in sector i A directly or indirectly required to roduce one unit of final demand in sector j. The sum of the elements of column j therefore gives the total value of outut required, directly and indirectly, to meet one unit of final demand for the outut of sector j. In the alication of the conventional environmental inut-outut aroach to water use, these value multiliers are transformed into hysical water multiliers which measure the hysical water required directly or indirectly to roduce a unit of final demand exenditure in each sector. These are derived as the sum of the conventional column entries in the Leontief inverse, each weighted by the corresonding industry i s direct hysical water coefficient. This generates a measure which is the direct and indirect use of hysical water er unit value of final demand. This rocedure is reresented formally in equation (2). m = w I A (2) 1 1[ ] 1 In equation (2) m1 is a (1x n) row vector, where the i th element is the i th industry s hysical water multilier value and w1 is a (1 x n) vector where the i th term is the direct hysical water use in sector i, xk,i divided by the total outut of sector i, qi,t, so that: w 1, i x ki, = i (3) qit, Note that here, as elsewhere, the water sector is denoted as sector k. Alternatively, the hysical water multilier, m 2, can be calculated using the Leontief generalised aroach. In this case, rather than directly track the hysical water use, the exenditure made on the water suly sector is used to indicate the resources used in cleaning and delivering water. To identify the direct and indirect water used in meeting a unit of final demand in sector j, we locate the j th element on the water suly row (the k th row) of the Leontief inverse and convert this value to hysical units by dividing by the average rice of water.

10 More formally, this is determined by re-multilying the Leontief Inverse by a (1 x n) row vector, w2, where all elements are zero art from the j th, which is the inverse of the average 1 rice of water,. This generates a (1 x n) row vector of hysical water multilier values, k m 2, as: 2 2 [ ] 1 m = w I A (4) The rice of water is found by summing the total exenditure on the outut of the water sector, across all intermediate and final demands taken from the inut-outut accounts, and dividing by the total water extracted for these uses. 3 Therefore: k q q = = x x ki, i= 1... n, f kt, i= 1... n, f ki, kt, (5) Where the f and T subscrits stand for final demand and total resectively. 4 The multilier values calculated using the standard environmental IO aroach (equation 2) and the Leontief generalised aroach (equation 4) are the same if one central assumtions of the value-denominated inut-outut analysis holds. This is that all uses of the outut of a articular sector should face the same rice for that good or service. In this secific case, this means that the two multilier values will be equal if all users of water face the same rice for water. If m1 m2, this is because the attern of hysical water use across sectors does not match the corresonding distribution of exenditure on the outut of the water sector, as catured in the inut-outut accounts. Discounting data reorting errors, there are two ossible reasons why this might be the case. First, the technology for abstracting, treating and distributing water might differ between uses. As Duchin (2009) argues, water itself is a common ool resource that is not 3 The way in which these hysical figures are calculated is given in Section 4 and formalised in equations (11) to (14). 4 An alternative way of calculating m 2 is m [ ] 1 2 = w3 I A where w 3 is a (1 x n) row vector where the ith element is a k,i/ k.

11 necessarily directly aid for. In the context of inut-outut accounts the water sector ays only for the resources needed to collect/abstract, treat and distribute water but not for the water itself. The differences in rice er unit of hysical water delivered could therefore reflect variations in the value of inuts needed to deliver that water to different uses. An alternative exlanation is that there is some form of rice discrimination in the suly of water to different industries and elements of final demand. This ersective has been reviously alied by Weisz and Duchin (2006) to consider the factors surrounding the differences between hysical and monetary inut outut analysis in general. It has also been alied by Allan et al. (2007) in the secific alication to the treatment of Scottish waste. In the case of Allan et al. s (2007) analysis of Scottish waste, the roduction sectors aear to ay only artially, and unsystematically, for waste treatment, so that, in effect, some sectors are charged more for waste disosal services than others. For the Welsh water use analysed in the resent aer, all the transactions involve the ublic water suly and therefore in rincile go through the market mechanism. Therefore in aggregate all the market resource costs are covered by firms aying for water as an intermediate inut and consumers aying for domestic suly. However, if there is no difference in the resources needed to suly water to different users, then any difference between the two hysical water multilier values ( m1 and m 2 ) is down to some form of rice discrimination. Whichever exlanation alies, if these multilier values differ, there are rima facie roblems for inut-outut analysis. If the resources needed to deliver water varies across uses, and if these are large enough to cause significant variation in the multilier values, then there should be greater disaggregation of the inut-outut table, articularly in this case the water sector. For examle, a disaggregation between the rovision of industrial and domestic water might be aroriate. 5 Only if the resources needed to deliver water are constant in comosition across uses but vary in their ability to deliver the same quantity of water will the conventional environmental inut-outut multilier, m 1, give the correct value (and the m2 value would give an inaccurate measure). 5 In a similar situation, Allan 2007 disaggregate the electricity suly sector in the Scottish inut-outut table into generation and distribution and then consider different renewable technologies in the alication of inut-outut analysis to energy issues.

12 Alternatively, if rice differences solely reflect rice discrimination, an aroriate adjustment can be made to correct the water multilier calculations. This involves changing the entries in the water row of the A matrix of the initial inut-outut accounts to reflect the true/actual water use. The initial water row vector is therefore relaced by an imlied water row vector derived from multilying the hysical water use er unit of value outut divided by the average rice of water. Again, identifying the water inut as the k th row, the resulting vector of multilier values, m 3, is given as: * 1 m3 = w 2 I A (6) In equation (6), elements of the matrix A * are given as the following: If i k, a = a * i, j i, j x If i = k, a = = w * ki, k k, j 1, i k qit, (7) Under rice discrimination, m3 is the correct water multilier value. 6 This rocedure corrects the water multilier value where rice differences reresent rice discrimination. It is erhas imortant to emhasise that this occurs through revising the entries in the conventional Leontief inverse. Imagine that there are rice variations across the uses to which a articular roduct or service - the outut of a secific sector - is ut. In this case, a given exenditure is associated with a different hysical outut of the roduct, deending on the use for which that exenditure were made. This also alies to elements of final demand for water. For examle, if exorts receive a lower rice than outut sold to home consumers, then in increase in household consumtion will be associated with a lower hysical outut, and a lower actual multilier imact, than an increase in exort exenditure. 6 An alternative way of dealing with the roblem of ure rice discrimination would be to construct the inut-outut table as a mixed table with the water sector secified in hysical units (Duchin, 2009; Weitsz and Duchin, 2006). However, our aroach mantains the accounting identities embedded in the value-denominated inut-outut accounts and facilitates the subsequent rice adjustment calculation.

13 These roblems occur whenever such rice discrimination is resent. Studying a relatively homogeneous sector, and focussing on the hysical outut of that sector, more easily reveals any rice differences that exist. Whilst these challenges almost certainly aly in other sectors, and could be more revalent with greater roduct differentiation, they are likely to be more difficult to detect. Where the divergence between the relative value and quantity of water used is attributed to rice discrimination, the inut-outut rice model can determine the subsequent deviation in the rices of all commodities, and therefore the imlicit rice subsidies or enalties. The rice model is the dual of the quantity model reresented by equation (1). In the original set of inut-outut accounts the sector rices are calibrated to take unit values and have the following form: T 1 i = I A v (8) where i is a (n x1) vector of ones, (1-A T ) -1 is the Leontief rice multilier and v is the vector of unit value added figures in the initial eriod. Equation (9) gives the corresonding set of rices, 3, where the original A matrix is relaced by the augmented A * matrix. * T 1 3 = I A v (9) This is the vector of rices that would hold if all sectors and final demand uses of water were charged at the same rice. Adoting the rice model allows the estimation of changes in relative rices across sectors that demand water services as inuts for roduction. Equation (10) calculates these changes 3 as the vector of ercentage rice variations: 3 = 3 i 100 (10) If the ayment for the services of the water sector were always roortional to the hysical amount of water urchased, then the multilier values generated using equations (2) (4) and (6) would be the same, i.e. m1 = m2 = m3 and each element of the 3 vector would

14 be 0. However, this is not the case using the Welsh data. These results are discussed in some detail in Section Data and derivation of adjusted inut-outut row entries for actual and imlied water use This aer uses data relating to the ublic water suly sector in Wales, which is a devolved region of the United Kingdom. The inut-outut accounts are for 2007, the latest date for which the Welsh inut-outut table is available (Jones et al., 2010). These accounts identify the urchases and sales of 88 searately defined industrial sectors, one of which is water suly. Some aggregation of these sectors is required to make them consistent with the data that are available on the industrial use of water resources. Table A1 in the Aendix reveals the industrial aggregation used in this aer and how the 88 sectors in the Welsh inut-outut framework are maed on to the 27 industries for which water consumtion data are available. Whilst the inut-outut data are Welsh secific, information on the hysical water use has to be estimated by satially disaggregating the English and Welsh Environmental Accounts. These rovide information on industrial and household water use (ublic water suly) together with water comanies leakages in England and Wales for From the outset it is imortant to say that this disaggregation is made rimarily on the assumtion that the intensity of water use across industries and for households do not differ between England and Wales. In so far as this is not true, the Welsh hysical water use figures will contain inaccuracies. The vector of Welsh industrial water use is calculated in the following way. Each element is determined by dividing the England and Wales water use figure in each industry in roortion to the corresonding industry s emloyment levels in the two regions. That is to say: 7 Data in the UK Environmental Accounts for industrial water use in England and Wales were derived from sources including DEFRA, Environment Agency, WRAP and WRC and include household use, water comany own use and system losses see

15 x e = W W E+ W i ki, xki, E+ W ei (11) In equation (11), xk,i is the use of water in hysical terms in industry i, (industry k is the water industry), ei is emloyment in industry i, and the W and E suerscrits aly to Wales and England resectively. W The Welsh household hysical water use, x kh,, is estimated based on the Welsh share of the England and Wales oulation (Po W /Po E+W ). This is given as: x Po = Po W W E+ W kh, xkh, E+ W (12) However, there is limited information on hysical water sulied to all non-household final W demand uses, x, k nh. This is essentially exort demand for Welsh water from England. The assumtion is made that the hysical share of non-household water outut to the hysical total outut is equal to the value share of non-household final demand to the value of all Welsh water outut, as given in the Welsh inut-outut tables. This corresonds to the assumtion that all non-household final demand uses ay the industry average rice for the water that they urchase, so that: 8 W W W qk, nh W W qk, nh xknh, = x W W kh, xki, qk, T q + = (13) k, nh i k W Total hysical Welsh water generation, x, equations (11), (12) and (13): kt, is the sum of the values calculated using x = x + x + x (14) W W W W kt, ki, kh, knh, i 8 The rice is determined in equation (5).

16 Using these rocedures total Welsh water roduction in 2007 (ublic water suly) is estimated at 253 million cubic metres, of which households accounted for 158 million (63%) and 69 million cubic metres (27%) were sulied to Welsh industries as intermediate inuts. Table 1 resents a condensed version of the 2007 Inut-Outut Tables for Wales, together with a number of additions. It shows the attern of sales of the water sector, the hysical use of water and the accounting adjustments required if exenditure on water is to match water use. Rows 1 to 6 give accounting data, measured in million, 2007 rices. Row 7 gives the hysical water use, measured in millions of cubic metres, calculated as discussed in equations (11) to (14). Rows 1 and 2 disaggregate the exenditures on domestic outut made by industrial sectors and final demand. Row 1, labelled Non-water sectors are the ayments made to the combined non-water sectors; that is, sectors 1-17 and (see Table A1). The entries in row 2, Payments to water sector give the ayments entry for water services in the original inut-outut accounts. The total outut of the water sector, at million, is just less than 0.5% of the total Welsh outut, which in 2007 is 140,916 million. Note that actual ayments for water are dominated by final demand and articularly household demand which, at million, makes u over 73% of the total. The exenditure on water as an intermediate inut is highest for the Chemicals & Pharmaceuticals, Public Administration, Basic Metals and Accommodation sectors. Each of these Welsh sectors sent more than 10 million on water in 2007, the highest being Chemicals & Pharmaceuticals, at million. Row 3 reorts the actual water use, measured in value terms. That is to say, it takes the hysical water use figure from row 7 of Table 2 and multilies this by the average rice of water. The figure in row 3 is therefore the exenditure for water in its different uses that would be made if water had the same rice in all uses. Note that rows 2 and 3 have the same row totals, but that the entries for individual uses differ, sometimes by a very large amount. To begin, the actual use of water as an intermediate inut is measured as million, over 66% higher than the actual ayment for water as an intermediate. The household use indicates an equal, and oosite, osition: household water ayments are greater than the value of water use. For the adjusted water use by individual sectors, six sectors now have values greater than 10 million. These are, in descending order,

17 Agriculture, Forestry & Fishing, Food & Drink, Accommodation, Health, Other Business Services and Chemicals & Pharmaceuticals. The figures in row 4, Additional ayment for water are the differences between the unadjusted (row 2) and adjusted (row 3) water ayment entries. The row total is zero, so that overayments are just balanced by underayments. Where the entries are ositive in this row, it imlies an overayment for water. This occurs for the household consumtion but also for some industrial sectors, such as Coke & Refined Petroleum, Chemicals & Pharmaceuticals, Basic Metals, Construction, and Public Administration. These include some sectors ( Chemicals and Basic Metals ) which are identified in revious analysis as high users of water er of Welsh GVA (Jones and Munday, 2011). 9 A negative row 4 entry shows that in the unadjusted system these sectors are net under ayers. Of the 28 industrial sectors, 19 sectors are net under ayers and with Agriculture, Forestry & Fishing, Food & Drink, Education and Health being resonsible for over three quarters of this underayment. Rows 5 and 6 give the other rimary inuts and total (unadjusted) value of inuts figures for each sector from the original Welsh table. The other rimary inuts include ayments for labour and other value added, together with imorts (from both the rest of the UK and the rest of the World), taxes and subsidies. For each sector, the unadjusted value of inuts figure is also the value of outut figure. If the differences in the cost of water for different uses solely reflect rice discrimination, the negative or ositive row 4 entries indicate whether any given sector is directly subsidising water use in other arts of the economy or is being subsidised. As well as looking at the relative exenditure by individual roduction sectors, it is also imortant to identify the osition relative to final demand uses. There are limitations here because for all non-household final demand sectors the assumtion has been imosed, in the face of insufficient hysical water use data, that these sectors fully ay for their water use, hence their zero value in row 4. However, the household sector s additional ayment entry, which is based on actual data, has a high ositive value million, suggesting that households 9 This revious analysis also emloyed Welsh inut-outut tables for 2007, but a different set of water consumtion data.

18 ay much more for water than their hysical water use imlies and are subsidising industrial water use, taken as a whole. 5. Alication to Analysis of Industrial Water Use in Wales In this section we use the Welsh data outlined in Section 4 to calculate the water multilier values m 1, m 2 and m3 given by equations (2), (4) and (6) in Section 3. We also use the equations (8), (9) and (10) to measure the rice imacts from imosing a uniform ricing for Welsh water. 5.1 Physical water multilier values Table 2 resents the Tye I and Tye II values for the three hysical water multiliers ( m1 m and m ) outlined in Section 3. Also reorted are the direct water coefficients required, 2 3 to calculate these multiliers. The first data column gives the hysical water use coefficient (xk,i/qi,t), measured in thousands of cubic meters er million of outut. These figures comrise the elements of the vector w1. On this measure, the four most water intensive sectors, in descending order, are Agriculture, Forestry & Fishing, Mining & Quarrying, Food & Drink and Accommodation. All of these sectors have a water intensity value over 2 thousand cubic meters of water er million of outut. The Agriculture, Forestry & Fishing value at 8,790 cubic meters is articularly high. The second data column reorts the corresonding original direct water coefficient in the A matrix. These figures give the roortion of total costs in that sector going directly to the water sector. Using this metric, the to four most water intensive sectors are: Chemicals & Pharmaceuticals, Agriculture, Forestry & Fishing, Accommodation and Non-Metallic Mineral. It is clear that ordering the sectors by the share of costs which go to intermediate water exenditure differs from ordering by the hysical water-use intensity. The third column gives the adjusted exenditure coefficients calculated by multilying the hysical coefficients in column 1 by the rice of water and dividing by a thousand. These are the water row coefficients used in the A * matrix incororated in the Leontief inverse emloyed in the calculation of m 3. The ordering of water intensities is exactly the same as

19 in column 1 but a comarison of columns 2 and 3 indicates the extent to which the two water intensity measures differ. For most industries, the adjusted coefficient is greater than the coefficient in the original inut-outut table. This is a corollary of the fact that the inut-outut accounts measure industrial exenditure to be less, and household exenditure to be more, water intensive than the hysical figures. The four sectors with the biggest difference in absolute terms between the adjusted and initial water coefficients are, again in decreasing order: Agriculture, Forestry & Fishing, Mining & Quarrying, Food & Drink and Furniture. In all these sectors, the actual ayment is lower than the amount of water used, valued at a constant rice. These adjustments are valued at 2.03%, 0.7%, 0.4% and 0.2% resectively of the total costs for these sectors. The four sectors which have the biggest negative difference between their adjusted and actual water ayment are Chemicals & Pharmaceuticals, Coke & Refined Petroleum, Basic Metals and Public Administration. This indicates that these sectors are aying more for their water use than would be exected from the hysical figures. However, these values are much smaller, at 0.09%, 0.08%, 0.06% and 0.05% of total costs resectively. The figures in columns 4 and 5 give the hysical water Tye I and Tye II multilier values using the conventional environmental inut-outut aroach, m 1, as given in equation (2). They are measured in thousand cubic meters for each million of final demand exenditure. The Tye I multiliers include only direct and indirect effects. That is to say, in measuring Tye I multiliers household consumtion is held constant and only endogenous intermediate water demands are included as elements of the suly chain. It is Tye I multiliers that are tyically used for footrint analysis. Tye II multiliers also incororate the induced water consumtion of direct workers, and also those workers attributed to the sectors extended suly chain. This would be the most aroriate multilier value for increases in activity which were exected to be accomanied by increases in oulation. The conventional Tye I hysical water multilier value resented in column 4 must be higher than the corresonding direct water coefficient shown in column 1, because it incororates both the direct water inut and the embedded water in the other intermediate inuts. For examle, in Agriculture, Forestry & Fishing, the direct water use is 8,790

20 cubic meters er 1 million final demand whereas the conventional Tye I value is 9,790 cubic meters. Tyically, the difference is relatively small but in some cases the roortionate differences can be large. The Food & Drink sector has a direct water coefficient of 2,320 cubic meters but a Tye I multilier value 60% higher at 3,790 cubic meters er million of final demand. The conventional hysical Tye II water multilier values are higher still, as they incororate additional induced household water use. The Tye II measure used endogenises all the household water use, which is more than double intermediate water use. Therefore, the Tye II hysical water multilier is significantly higher than the Tye I value for most sectors. Although the Agriculture, Forestry & Fishing sector maintains its osition as the most water intensive on this measure, other, more labour intensive, sectors begin to lay a more rominent role. Education moves from 1,110 cubic meters on the Tye I multilier to 8,230 cubic meters for the Tye II and takes second lace on that measure. Accommodation shows a similarly large gain moving from the Tye I to Tye II multilier measure and at 6,740 cubic meters er 1 million final demand is the third most water intensive sector. The Tye I and Tye II hysical water multilier values calculated on the basis of water sector ayments are shown in columns 6 and 7. Note first the low value for the Tye I multilier values. For 20 industries the Tye I m 2 multilier value is lower than the corresonding m1 figure. The Tye I m 2 multilier value is never greater than 2,000 cubic meters er 1million and in only five sectors is it greater than 1,000 cubic meters er 1 million. Chemicals & Pharmaceuticals has the largest value, at 1,830 cubic meters, followed by Agriculture, Forestry & Fishing, Accommodation, Food & Drink sectors. The relative low measure stems from the lower exenditure on water as an intermediate inut than would be exected from the hysical water use. The Tye II values incororate household water use which is overvalued in the exenditure (as against hysical) figures. This means that there is no overall bias in the Tye II m2 value but there are big differences in the Tye II m 1 and m values for some individual sectors. Examles are Agriculture Forestry & Fishing, Mining & Quarrying, Food & Drink and Wood. 2

21 The m3 multilier adjusts the Leontief inverse so that the technical water exenditure coefficients match the hysical intermediate and final demand water use values. If the adjusted A matrix is used, the conventional and the extended Leontief multilier values 1 1 * * into line, so that w 1 1 A = w 2 1 A. This is the aroriate rocedure if the mismatch between the hysical and exenditure water use data is solely due to rice discrimination amongst water uses. In this case it is clear that the m 3 values are much closer to those for m1 than to those for m 2. This suggests that calculating the hysical water multiliers by just tracking the value of outut of water sector will give otentially very inaccurate multilier values for some individual sectors. On the other hand, the conventional environmental aroach, which augments the value Leontief inverse with direct hysical water/outut ratios generates multilier estimates which, whist theoretically incorrect, are extremely close to the m 3 values. However, this almost certainly reflects the small scale of the water sector in the Welsh economy. Adjusting the coefficients for a large sector should have bigger imacts on the calculated inverse values. 5.2 Price multiliers If the variation across uses in the rice aid er unit of delivered hysical water is the result of ure rice discrimination, then the imact on commodity rices of adjusting the water ayments for the actual direct water use can be calculated using equations (8), (9) and (10). The deviations from the original rices are given in Table 3. These figures show whether sectors at resent bear the full resource cost (or not) of water use through direct and/or knock on imacts on the rice of their outut. Column 1 reorts the imacts on the rices of sectoral outut using the Tye I rice multilier values and the adjusted system. In this case wage ayments are taken as an element of the value added vector, v, and do not adjust to variations in the sector rices; the nominal wage is held constant. The ercentage change in rices in column 2 identify the corresonding results using Tye II multiliers. Essentially this holds the real wage constant and adjusts the nominal wage to changes in sector rices. An imortant issue here is that the rice consumers ay for water is above the average rice so that an adjustment to uniform ricing will have a direct imact on the nominal wage.

22 In the Tye I case there are 7 sectors where the rice of outut would be lower if a uniform rice is charged for water across all uses. The largest negative adjustments are for the Construction, Coke & Refined Petroleum and Chemicals & Pharmaceuticals sectors. However, these imacts are small. These sectors all suffer a cost disadvantage of less than 0.1% stemming from the existing water rice differentials. In 21 sectors the adjustment increases the Tye I rice multilier values. In some cases, the imact is articularly high, with the Agriculture, Forestry & Fishing rice increasing by 2.24% and rices in the Mining & Quarrying, and Food & Drink sectors rising by 0.80% and 0.74% resectively. In calculating the Tye II adjusted rices, two changes to the Tye I method are made. First wage income is removed from the vector of sectoral value added, so that all elements in the value added vector are reduced. Second, the A matrix is augmented to incororate the wage and household exenditure. The net imact is to reduce the adjusted rice in all sectors as against the Tye I value. That is to say, if with the Tye I multilier the rice adjustment was negative, it is even more negative with the Tye II calculation. On the other hand, if the Tye I rice change is ositive, the Tye II value will be smaller, or even negative. The biggest difference occurs for Education. Row 4 in Table 3 shows that Education is a net under-ayer for water. This is reflected in the higher Tye I rice multilier in the first column of Table 7. However, Education is a labour/wage intensive sector. This means that in the Tye II case it is imacted by the effect of households over-aying for water as an inut to rovision of labour services. In the adjusted system, on the other hand, where households only ay the unit cost for the water they actually use, this uts downward ressure on the cost of labour and on the rice multiliers of labour-using sectors. 6. Conclusions This aer exlores alternative inut-outut aroaches to generating hysical multilier values using Welsh water data. In articular, it comares the results from using the conventional hysical environmental inut-outut model with an aroach based uon an earlier generalised Leontief (1970) method, both with and without adjustments to the A matrix. Essentially the generalised Leontief method uses the demand for the outut of the industry involved in the collection, rearation and movement of water as an index of

23 hysical water use. The motivation for using this alternative aroach came from the imortance attached in Leontief (1970) for cleaning sectors. However, in many other cases the hysical use of environmental goods, such as rare metals, could be tracked by the exenditures on the industries sulying such goods. In the case of Welsh water, the generalised Leontief model works very badly. This is because the rice aid er hysical amount of water aears to vary greatly amongst different uses. In general, the data suggest water used for household consumtion is charged at a higher rice than for intermediate industrial demand. There is also a wide rice variation across different industries. Only if hysical water-use data are emloyed to adjust the inut-outut A matrix does the generalised Leontief model work satisfactorily. In rincile this is roblematic for inut-outut analysis in general. However, the small scale of the Welsh water sector means that in actual fact, the conventional environmental inutoutut multiliers aear to be quite accurate. In terms of imlications for olicy, they key issue is that accurate hysical water multilier values are required in order to calculate the imact of industrial develoment strategies on the demand for water and therefore the sustainability of growth. The major olicy imlication of this work for Wales is that water exenditure information reorted in the core economic inut-outut accounts is inadequate for roducing accurate hysical water multilier values. This imlies that the tables must be augmented with direct hysical water coefficients. However, hysical data on resource use and hysical data (often referred to as environmental satellite accounts) are commonly not available, articularly at a regional level. Section 4 has exlained that Welsh secific hysical water coefficients are unavailable so that averages across a wider England and Wales region have had to be alied.

24 References Allan, G., McGregor, P.G., Swales, J.K., and Turner, K., Imact of alternative electricity generation technologies on the Scottish economy: an illustrative inut-outut analysis. Proceedings of the Institution of Mechanical Engineers, Part A: Journal of Power and Energy, 221 (2), Allan, G.J., Hanley, N.D., Mcgregor, P.G., Kim Swales, J., and Turner, K.R., Augmenting the inut--outut framework for common ool resources: oerationalising the full Leontief environmental model. Economic Systems Research, 19 (1), Carter, H.O. and Ireri, D., Linkage of California-Arizona inut-outut models to analyze water transfer atterns. University of California, Deartment of Agricultural Economics. Cazcarro, I., Pac, R.D., and Sánchez-Chóliz, J., Water consumtion based on a disaggregated Social Accounting Matrix of Huesca (Sain). Journal of Industrial Ecology, 14 (3), Chaagain, A.K., Hoekstra, A.Y., Savenije, H.H.G., and Gautam, R., The water footrint of cotton consumtion: An assessment of the imact of worldwide consumtion of cotton roducts on the water resources in the cotton roducing countries. Ecological Economics, 60 (1), Daly, H.E., On economics as a life science. The Journal of Political Economy, Defra (2011) 'Water for Life' (See htts:// Dietzenbacher, E. and Velázquez, E., Analysing Andalusian Virtual Water Trade in an Inut Outut Framework. Regional Studies, 41 (January 2015), Duarte, R. and Yang, H., Inut Outut and Water: Introduction To the Secial Issue. Economic Systems Research, 23 (January 2015), Duchin, F., Inut-outut economics and material flows. In: Handbook of inut-outut economics in industrial ecology. Sringer, Environmental Agency (2015) 2010 to 2015 Government Policy: Water Industry (See htts:// Euroean Union (2011) Bluerint to safeguard Euroe s water resources (See htt:// EU Water Framework Directive (2000). See htt://ec.euroa.eu/environment/water/waterframework/index_en.html Feng, S., Li, L.X., Duan, Z.G., and Zhang, J.L., Assessing the imacts of South-to-North Water Transfer Project with decision suort systems. Decision Suort Systems, 42 (4), Guan, D. and Hubacek, K., Assessment of regional trade and virtual water flows in China. Ecological Economics, 61 (1), Hoekstra, A.Y. and Chaagain, A.K., Water footrints of nations: water use by eole as a function of their consumtion attern. Water resources management, 21 (1), Isard, W., Some notes on the linkage of the ecologic and economic systems. Paers in Regional Science, 22 (1), Jones, C.,Bryan J., Munday, M and Roberts A (2010) Inut-Outut Tables for Wales 2007, available from Welsh Economy Research Unit, Cardiff Business School, cardiff, UK.

25 Lange, G.-M., Alying an integrated natural resource accounts and inut--outut model to develoment lanning in Indonesia. Economic Systems Research, 10 (2), Leontief, W., Environmental reercussions and the economic structure: an inut-outut aroach. The review of economics and statistics, Leontief, W. and Ford, D., Air ollution and the economic structure: emirical results of inutoutut comutations. Inut-outut techniques, Miller, R.E. and Blair, P.D., Inut-Outut Analysis: Foundations and Extensions. Cambridge University Press. Okadera, T., Geng, Y., Fujita, T., Dong, H., Liu, Z., Yoshida, N., and Kanazawa, T., Evaluating the water footrint of the energy suly of Liaoning Province, China: A regional inut outut analysis aroach. Energy Policy, 78, Seung, C.K., Harris, T.R., and MacDiarmid, T.R., Economic imacts of surface water reallocation olicies: A comarison of suly-determined SAM and CGE models. Journal of Regional analysis and Policy, 27, Velázquez, E., An inut outut model of water consumtion: Analysing intersectoral water relationshis in Andalusia. Ecological Economics, 56 (2), Victor, P.A., Pollution: economy and environment. Weisz, H. and Duchin, F., Physical and monetary inut--outut analysis: What makes the difference? Ecological Economics, 57 (3), White, D.J., Feng, K., Sun, L., and Hubacek, K., A hydro-economic MRIO analysis of the Haihe River Basin s water footrint and water stress. Ecological Modelling. Wiedmann, T., A review of recent multi-region inut outut models used for consumtionbased emission and resource accounting. Ecological Economics, 69 (2), Wiedmann, T., Lenzen, M., Turner, K., and Barrett, J., Examining the global environmental imact of regional consumtion activities - Part 2: Review of inut-outut models for the assessment of environmental imacts embodied in trade. Ecological Economics, 61, Yu, Y., Hubacek, K., Feng, K., and Guan, D., Assessing regional and global water footrints for the UK. Ecological Economics, 69 (5), Zhang, J., Mauzerall, D.L., Zhu, T., Liang, S., Ezzati, M., and Remais, J. V, Environmental health in China: rogress towards clean air and safe water. The lancet, 375 (9720),