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Energy Policy 33 (2005) 867871

The LMDI approach to decomposition analysis: a practical guide


B.W. Ang*
Department of Industrial and Systems Engineering, National University of Singapore, 10 Kent Ridge Crescent, Singapore 119260, Singapore

Abstract

In a recent study, Ang (Energy Policy 32 (2004)) compared various index decomposition analysis methods and concluded that the
logarithmic mean Divisia index method is the preferred method. Since the literature on the method tends to be either too technical or
specic for most potential users, this paper provides a practical guide that includes the general formulation process, summary tables
for easy reference and examples.
r 2003 Elsevier Ltd. All rights reserved.

Keywords: Decomposition analysis; Index decomposition analysis; Divisia index; LMDI

1. The LMDI formulation process kth factor on the right-hand side of Eqs. (2) and (3) are
respectively:
Let V be an energy-related aggregate. Assume that !!
X LV T ; V 0 x T
k;i
there are n factors contributing to changes in V over i i
Dxk exp ln 0
time and each is associated with a quantiable variable i
LV T ; V 0 xk;i
whereby there are n variables, x1 ; x2 ; y; xn : Let sub- X V T  V 0 =ln V T  ln V 0
i i i i
script i be a sub-category of the aggregate for which exp T  V 0 =ln V T  ln V 0
i
V
structural change is to be studied. At the sub-category !!
level the relationship Vi x1;i x2;i ?xn;i holds. The xTk;i
general index decomposition analysis (IDA) identity is  ln ; 4
x0k;i
given by
X X !
V Vi x1;i x2;i ?xn;i : 1 X xTk;i
DVxk LViT ; Vi0 ln
i i x0k;i
0 0 0
P 0
i
!
P from V i x1;i x2;i yxn;i in
The aggregate changes X ViT  Vi0 xTk;i
period 0 to V T i xT1;i xT2;i yxTn;i in period T: In ln 0 ; 5
multiplicative decomposition, we decompose the ratio: i
ln ViT  ln Vi0 xk;i

Dtot V T =V 0 Dx1 Dx2 yDxn : 2 where La; b a  b=ln a  ln b as dened in Ang


(2004).2 The general formulae in the formulation process
In additive decomposition we decompose the difference:
are summarized in Table 6 in Appendix A.
DVtot V T  V 0 DVx1 DVx2 ? DVxn : 3
The subscript tot represents the total or overall change
2. Two illustrative cases
and the terms on the right-hand side give the effects
associated with the respective factors in Eq. (1).
Changes in industrial energy consumption may be
In the logarithmic mean Divisia index (LMDI)
studied by quantifying the impacts of changes in three
approach,1 the general formulae for the effect of the
different factors: overall industrial activity (activity
*Tel.: +65-687-422-03; fax: +65-677-714-34. effect), activity mix (structure effect) and sectoral energy
E-mail address: iseangbw@nus.edu.sg (B.W. Ang). intensity (intensity effect). The sub-category of the
1
The LMDI is used here to refer to the logarithmic mean Divisia
2
method I (LMDI I). A related version, the LMDI II, has a weighting For more on Eqs. (4) and (5), see Ang and Liu (2001) and Ang et al.
scheme slightly more complex than LMDI I (Ang et al., 2003). (1998), respectively.

0301-4215/$ - see front matter r 2003 Elsevier Ltd. All rights reserved.
doi:10.1016/j.enpol.2003.10.010
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868 B.W. Ang / Energy Policy 33 (2005) 867871

aggregate is industrial sector. The IDA identity in Table 1


Eq. (1) is Aggregate data for Canadian industry, 1990 and 2000
X X Qi E i X Year C (MTCO2) E (PJ) Q (gross output, 1986 C$ billions)
E Ei Q QSi Ii ; 6
i i
Q E i 1990 114.31 2336.5 295.2
2000 135.11 2714.3 442.5
whereP E is the total energy consumption in the industry,
Q i Qi is the total industrial activity level, and
Si Qi =Q and Ii Ei =Qi are, respectively, the
activity share and energy intensity of sector i: From Table 2
Eqs. (2) and (3), Results of industrial energy consumption decomposition for Canada,
19902000: multiplicative decomposition
Dtot E T =E 0 Dact Dstr Dint ; 7
Dtot Dact Dstr Dint
T 0
DEtot E  E DEtot DEact DEstr DEint : 8 1.162 1.498 0.806 0.963

The subscripts act, str and int denote the effects


associated with the overall activity level, activity
structure and sectoral energy intensity, respectively. Table 3
The LMDI formulae can be readily worked out Results of industrial energy consumption decomposition for Canada,
from Table 6 and they are summarized in Table 7 in 19902000: additive decomposition (PJ)
Appendix A. DEtot DEact DEstr DEint
Changes in CO2 emissions from industry may be
377.8 1018.6 544.7 96.1
studied by quantifying the contributions from changes
in ve different factors: overall industrial activity
(activity effect), industry activity mix (structure effect),
sectoral energy intensity (intensity effect), sectoral Table 4
energy mix (energy-mix effect), and CO2 emission Results of industry energy-related CO2 emission decomposition for
factors (emission-factor effect). The sub-categories of Canada, 19902000: multiplicative decomposition
the aggregate are industrial sector and fuel type. The Dtot Dact Dstr Dint Dmix Demf
IDA identity in Eq. (1) may be written as
1.182 1.493 0.814 0.951 0.980 1.044
X X Qi Ei Eij Cij X
C Cij Q QSi Ii Mij Uij ; 9
ij ij
Q Qi Ei Eij ij

where C is the total CO2 emissions and Cij is the CO2 database includes a total of 23 industrial sectors and 14
emissions arising from fuel j in industrial sector i; Eij is energy sources. The aggregate CO2 emissions in million
the consumption of fuel j in industrial sector i, tonnes of CO2 (MTCO2), energy consumption in
P
where Ei j Eij ; the fuel-mix variable is given petajoules (PJ) and gross industrial output in Canadian
by Mij Eij =Ej and the CO2 emission factor by dollars (C$) are shown in Table 1.3 The observed
Uij Cij =Eij : From Eqs. (2) and (3), we have changes in energy consumption and CO2 emissions
are shown in the rst column of Tables 25. The other
Dtot C T =C 0 Dact Dstr Dint Dmix Demf ; 10 columns of the tables give the decomposition
results obtained using the decomposition formulae in
DCtot C T  C 0 Appendix A.4
From Tables 2 and 3, it can be seen that Canadian
DCact DCstr DCint DCmix DCemf : 11
industrial energy consumption increased by 16.2% or
The subscripts act, str, int, mix and emf, respectively, 377.8 PJ from 1990 to 2000. The LMDI decomposition
denote the effects associated with overall activity,
activity structure, sectoral energy intensity, sectoral 3
energy mix and emission factors. The LMDI formulae Nyboer (2002) and Nyboer and Laurin (2002) do not give CO2
emissions arising from electricity consumption. We estimated the
are summarized in Table 8 in Appendix A. equivalent emission factors for electricity from the 1990 and 2000
Canadian energy balances in International Energy Agency (1993,
2002), by dividing the total emissions for fuel consumption in
3. Numerical examples electricity generation by the total nal electricity consumption in
Canada in the respective years.
4
Due to differences in data source, industry coverage, sector
We collected the 1990 (Year 0) and 2000 (Year T) classication, industrial activity measurement and decomposition
energy and CO2 emission data for industry in Canada technique, the additive decomposition results obtained here are
from Nyboer (2002) and Nyboer and Laurin (2002). The different from those in Natural Resources Canada (2002).
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B.W. Ang / Energy Policy 33 (2005) 867871 869

Table 5
Results of industry energy-related CO2 emission decomposition for Canada, 19902000: additive decomposition (MTCO2)

DCtot DCact DCstr DCint DCmix DCemf

20.80 49.84 25.58 6.30 2.48 5.31

Table 6
LMDI formulae for the general case with n factors
P P
IDA identity V i Vi i x1;i x2;i :::xn;i

Multiplicative decomposition Additive decomposition


Change scheme Dtot V T =V 0 Dx1 Dx2 ?Dxn DVtot V T  V 0 DVx1 DVx2 ? DVxn
!! !
P ViT  Vi0 =ln ViT  ln Vi0 xTk;i P ViT  Vi0 xTk;i
LMDI formulae Dxk exp i ln 0 DVxk i ln 0
V T  V 0 =ln V T  ln V 0 xk;i ln ViT  ln Vi0 xk;i

Note: (a) Where xk;i 0; replace all the zeros in the data set by a small positive constant, e.g. between 1010 and 1020. (b) It can be shown that
lnDtot lnDx1 lnDx2 ? lnDxn : (c) The following relationship holds: DVtot =ln Dtot DVx1 =ln Dx1 DVx2 =ln Dx2 ? DVxn =ln Dxn :

Table 7
LMDI formulae for decomposing changes in industrial energy consumption

IDA identity P P Qi Ei P
E i Ei i Q i QSi Ii
Q Qi

Multiplicative decomposition Additive decomposition


Change scheme Dtot E T =E 0 Dact Dstr Dint DEtot E T  E 0 DEact DEstr DEint
  T   T
P EiT  Ei0 =ln EiT  ln Ei0 Q P EiT  Ei0 Q
LMDI formulae Dact exp i T 0 T 0
ln DEact i T 0
ln
E  E =ln E  ln E Q0 ln Ei  ln Ei Q0
 T 0 T 0
 T  T 0
 T
P Ei  Ei =ln Ei  ln Ei S P Ei  Ei S
Dstr exp i ln i0 DEstr i ln i0
E T  E 0 =ln E T  ln E 0 S ln EiT  ln Ei0 S
  Ti   Ti 
P EiT  Ei0 =ln EiT  ln Ei0 Ii P EiT  Ei0 Ii
Dint exp i ln 0 DEint i ln 0
E T  E 0 =ln E T  ln E 0 Ii ln EiT  ln Ei0 Ii

results show that the activity effect led to an increase mix led to a reduction but changes in emission factors
almost three times that margin, and the much lower led to an increase in emissions. Changes in energy mix
growth observed was due to structural change in arose from a shift towards cleaner fuels in nal energy
production and a reduction in sectoral energy intensity. use while changes in emission factors arose from an
Reduction in sectoral energy is often taken as a measure increase in the share of fossil fuels in electricity
of improvement in energy efciency. The impact of generation. Overall, the relative contributions of the
structural change in reducing energy consumption, ve factors show the importance of the impact of
arising from the shift in the composition of industry industry structure change in reducing the growth of CO2
output towards less energy-intensive sectors, was emissions despite a substantial increase in the overall
estimated to be nearly six times that of improvement industrial output.
in energy efciency.
From Tables 4 and 5, CO2 emissions increased by
18.2% or 20.80 MTCO2 from 1990 to 2000. The LMDI 4. Some LMDI application issues
decomposition results show that the activity effect led to
an increase almost two and a half times that margin but, An attractive feature of LMDI is the ease of
like the case of energy consumption, actual growth in formulation, which can be seen from the formulae in
emissions was much lower because of structural change Appendix A. The LMDI formulae can be readily
in production and, to a lesser extent, reduction in derived once the IDA identity has been specied.
sectoral energy intensity. In addition, changes in energy Commercially available spreadsheet software packages
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870 B.W. Ang / Energy Policy 33 (2005) 867871

Table 8
LMDI formulae for decomposing changes in energy-related CO2 emissions from industry

IDA identity P P Qi Ei Eij Cij P


C ij Cij ij Q ij QSi Ii Mij Uij
Q Qi Ei Eij

Multiplicative decomposition Additive decomposition


Change scheme Dtot C T =C 0 Dact Dstr Dint Dmix Demf DCtot C T  C 0 DCact DCstr DCint DCmix DCemf

 T !  T
P CijT  Cij0 =ln CijT  ln Cij0 Q P CijT  Cij0Q
LMDI formulae Dact exp ij ln DCact ij ln
C T  C 0 =ln C T  ln C 0 Q0 ln CijT  ln Cij0 Q0
T 0 T 0  T ! T 0  T
P Cij  Cij =ln Cij  ln Cij S P Cij  Cij S
Dstr exp ij ln i0 DCstr ij ln i0
C T  C 0 =ln C T  ln C 0 Si ln CijT  ln Cij0 Si
 T !  T
P CijT  Cij0 =ln CijT  ln Cij0 I P CijT  Cij0 Ii
Dint exp ij ln 0 DCint ij ln 0
C T  C 0 =ln C T  ln C 0 I ln CijT  ln Cij0 Ii
!! !
T T
0
P Cij  Cij =ln Cij  ln Cij 0
MijT P T
Cij  Cij 0
MijT
Dmix exp ij ln DCmix ij ln
C T  C 0 =ln C T  ln C 0 Mij0 ln CijT  ln Cij0 Mij0
!! !
T T
0
P Cij  Cij =ln Cij  ln Cij 0
UijT P T
Cij  Cij 0
UijT
Demf exp ij ln DCemf ij ln
C T  C 0 =ln C T  ln C 0 Uij0 ln CijT  ln Cij0 Uij0

can be adopted to meet the computational needs and Dact = 1.493

present the results in a graphical form. As an illustra- 1.5


tion, Fig. 1 shows a radar chart for the multiplicative
case while Fig. 2 shows a bar chart for the additive case 1.0
using the numerical results presented in Tables 4 and 5,
respectively. 0.5 Dstr = 0.814
Demf =1.044
From Eqs. (4) and (5), the LMDI formulae contain
logarithmic terms and the variables cannot have 0.0
negative values. This is a limitation of LMDI but in
IDA negative values seldom occur. A more likely
situation is the occurrence of zero values, i.e. xk;i 0:
In the analysis in Section 3, this occurs for sectoral
energy mix and CO2 emission factors. To overcome this
Dmix = 0.980 Dint = 0.951
problem, all the zeros in the data set may be replaced by
a small positive constant, e.g. between 1010 and 1020, Dtot = 1.182 = Dact Dstr Dint Dmix Demf

and the computation could proceed as usual. The results Fig. 1. Presentation of multiplication decomposition results in
converge as the small positive constant approaches zero Table 4.
(Ang et al., 1998).
The LMDI method has several practical advantages
from the application viewpoint. First, LMDI gives 60
20.80 49.84 -25.58 -6.30 -2.48 5.31
perfect decomposition, i.e. the results do not contain 50
an unexplained residual term, which simplies the result
interpretation. Second, the results given by the multi- 40
plicative LMDI possess the following additive property: 30
lnDtot lnDx1 lnDx2 ? lnDxn : Third, there
MTCO 2

exists a simple relationship between multiplicative and 20


additive decomposition, i.e. DVtot =ln Dtot DVxk =ln Dxk
10
for all k; which makes separate decomposition using =
+ Cstr + Cint + Cmix +
the multiplicative and additive schemes unnecessary. 0
Finally, LMDI is consistent in aggregation (Ang and Ctot Cact Cemf
-10
Liu, 2001). Estimates of an effect at the sub-group level
can be aggregated to give the corresponding effect at the -20
group level, a property useful in multi-level aggregation
studies, e.g. grouping industry activities into sub-groups, -30

countries into regions, etc. Fig. 2. Presentation of additive decomposition results in Table 5.
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B.W. Ang / Energy Policy 33 (2005) 867871 871

5. Conclusion References

As a follow-up to the study by Ang (2004), this paper Ang, B.W., 2004. Decomposition analysis for policymaking in energy:
gives a practical guide to the LMDI decomposition which is the preferred method? Energy Policy 32 (in press).
Ang, B.W., Liu, F.L., 2001. A new energy decomposition method:
approach. It will be useful to practitioners interested in perfect in decomposition and consistent in aggregation. Energy 26,
adopting the approach. We summarise the general and 537548.
specic LMDI formulae for ease of reference, and Ang, B.W., Zhang, F.Q., Choi, K.H., 1998. Factorizing changes in
present two examples using real data. Some application energy and environmental indicators through decomposition.
issues are also dealt with. Energy 23, 489495.
Ang, B.W., Liu, F.L., Chew, E.P., 2003. Perfect decomposition
techniques in energy and environmental analysis. Energy Policy 31,
15611566.
International Energy Agency, 1993. Energy Balances of OECD
Acknowledgements Countries 19901991. OECD, Paris.
International Energy Agency, 2002. Energy Balances of OECD
The author wishes to acknowledge the assistance of Countries 19992000. OECD, Paris.
Natural Resources Canada, 2002. Energy efciency trends in Canada
Chuen-Wei Chew in carrying out the calculations 19902000. Ofce of Energy Efciency, Ottawa, Canada.
reported in Section 3. Nyboer, J., 2002. Development of energy intensity indicators for
Canadian industry 19902000. Canadian Industrial Energy End-
use Database and Analysis Centre, Simon Fraser University,
Canada.
Appendix A
Nyboer, J., Laurin, A., 2002. Development of greenhouse gas intensity
indicators for Canadian industry supplementary 19902000: CO2
The LMDI formulae for the general case and the two emissions. Canadian Industrial Energy End-use Database and
illustrative cases in Section 2 are given in Tables 68. Analysis Centre, Simon Fraser University, Canada.