# ARTICLE IN PRESS

Energy Policy 33 (2005) 867–871

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
speciﬁc for most potential users, this paper provides a practical guide that includes the general formulation process, summary tables
for easy reference and examples.

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 LðV T ; V 0 Þ x T
k;i
there are n factors contributing to changes in V over i i
Dxk ¼ exp ln 0
time and each is associated with a quantiﬁable variable i
LðV T ; V 0 Þ xk;i
whereby there are n variables, x1 ; x2 ; y; xn : Let sub- X ðV T  V 0 Þ=ðln V T  ln V 0 Þ
i i i i
script i be a sub-category of the aggregate for which ¼ exp T  V 0 Þ=ðln V T  ln V 0 Þ
i
ðV
structural change is to be studied. At the sub-category !!
level the relationship Vi ¼ x1;i x2;i ?xn;i holds. The xTk;i
general index decomposition analysis (IDA) identity is  ln ; ð4Þ
x0k;i
given by
X X !
V¼ Vi ¼ x1;i x2;i ?xn;i : ð1Þ X xTk;i
DVxk ¼ LðViT ; Vi0 Þln
i i x0k;i
0 0 0
P 0
i
!
P from V ¼ i x1;i x2;i yxn;i in
The aggregate changes X ViT  Vi0 xTk;i
period 0 to V T ¼ i xT1;i xT2;i yxTn;i in period T: In ¼ ln 0 ; ð5Þ
multiplicative decomposition, we decompose the ratio: i
ln ViT  ln Vi0 xk;i

Dtot ¼ V T =V 0 ¼ Dx1 Dx2 yDxn : ð2Þ where Lða; bÞ ¼ ða  bÞ=ðln a  ln bÞ as deﬁned 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 ¼ V T  V 0 ¼ DVx1 þ DVx2 þ ? þ DVxn : ð3Þ
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.