In this study we use Divisia index approach to identify key factors affecting CO, emission changes of industrial sectors in Taiwan. The changes of CO2 emission are decomposed into emission coefficient, energy intensity, industrial structure and economic growth. Furthermore, comparisons with USA, Japan, Germany, the Netherlands and South Korea are made to have a better understanding of emission tendency in these countries and to help formulate our CO, reduction strategies for responding to the international calls for CO, cuts. The results show that economic growth and high energy intensity were two key factors for the rapid increase of industrial CO2 emission in Taiwan, while adjustment of industrial structure was the main component for the decrease. Although economic development is important, Taiwan must keep pace with the international trends for CO, reduction. Among the most important strategies are continuous efforts to improve energy intensity, fuel mix toward lower carbon, setting targets for industrial CO2 cuts, and advancing green technology through technology transfer. Also, the clean development mechanism (CDM) is expected to play an important role in the future. (c) 2005 Elsevier Ltd. All rights reserved.