Handling zero values in the logarithmic mean Divisia index decomposition approach

The Logarithmic Mean Divisia Index (LMDI) decomposition approach has many desirable properties. It has been recommended by Ang 2004a. Decomposition analysis for policymaking in energy: which is the preferred methods? Energy Policy 32, 1131–1139] for adoption in energy and energy-related environmental index decomposition analysis (IDA). A complication associated with this approach is the treatment of zero values in the data set. Several studies show that replacing the zero values with a small number gives converging results. In a recent paper, Wood and Lenzen Zero-value problems of the logarithmic mean Divisia index decomposition method. Energy Policy, in press] argue that this strategy is not necessarily robust and recommend using the analytical limits proposed in Ang et al. 1998. Factorizing changes in energy and environmental indicators through decomposition. Energy 23, 489–495]. We compare these two strategies and extend earlier works by generalizing the analytical limits of LMDI.