Do intensity targets control uncertainty better than quotas ? Conditions, calibrations, and caveats

Among policy instruments to control future greenhouse gas emissions, well-calibrated general intensity targets are known to lead to lower uncertainty on the amount of abatement than emissions quotas (Jotzo and Pezzey 2004). The authors test whether this result holds in a broader framework, and whether it applies to other policy-relevant variables as well. To do so, they provide a general representation of the uncertainty on future GDP, future business-as-usual emissions, and future abatement costs. The authors derive the variances of four variables, namely (effective) emissions, abatement effort, marginal abatement costs, and total abatement costs over GDP under a quota, a linear (LIT) and a general intensity target (GIT)-where the emissions ceiling is a power-law function of GDP. They confirm that GITs can yield a lower variance than a quota for marginal costs, but find that this is not true for total costs over GDP. Using economic and emissions scenarios and forecast errors of past projections, the authors estimate ranges of values for key parameters in their model. They find that quotas dominate LITs over most of this range, that calibrating GITs over this wide range is difficult, and that GITs would yield only modest reductions in uncertainty relative to quotas.Transport and Environment,Climate Change,Environment and Energy Efficiency,Economic Theory&Research,Energy and Environment

Financial markets as a complex system: A short time scale perspective

In this paper we want to discuss macroscopic and microscopic properties of financial markets. By analyzing quantitatively a database consisting of 13 minute per minute recorded financial time series, we identify some macroscopic statistical properties of the corresponding markets, with a special emphasize on temporal correlations. These analysis are performed by using both linear and nonlinear tools. Multivariate correlations are also tested for, which leads to the identification of a global coupling mechanism between the considered stock markets. The application of a new formalism, called transfer entropy, allows to measure the information flow between some financial time series. We then discuss some key aspects of recent attemps to model financial markets from a microscopic point of view. One model, that is based on the simulation of the order book, is described more in detail, and the results of its practical implementation are presented. We finally address some general aspects of forecasting and modeling, in particular the role of stochastic and nonlinear deterministic processes. --time series analysis,econophysics,simulated markets,temporal correlations,high-frequency data

Creating an independent carbon authority might offer a solution for reforming the EU’s Emissions Trading Scheme

The EU’s Emissions Trading Scheme (EU ETS) aims to reduce greenhouse gas emissions using a ‘cap and trade’ system, in which levels of emissions are capped, but participants can buy and sell allowances as they require. Godefroy Grosjean and Robert Marschinski note that the system has been undermined due to the price of permits falling drastically since 2008. They provide an overview of some of the potential options available for reforming EU ETS, including the creation of an independent carbon authority analogous to an independent central bank

Service Trade Restrictiveness and Foreign Direct Investment: Evidence from Greenfield FDI in Business Services

We study the impact of service trade restrictions on bilateral greenfield FDI projects in four different business services sectors within a gravity model framework. Project level FDI data for 42 destination countries and up to 41 source countries spanning the years 2014 to 2018 is taken from the fDi Markets database, and restrictions from the OECD’s Service Trade Restrictiveness Index (STRI). Using a negative binomial estimator to explain the number of bilateral FDI projects, we find that service trade restrictions represent a significant barrier for greenfield FDI. In 3 out of 4 business services we obtain statistically significant evidence of a negative impact. Furthermore, the explanatory power of the models generally improves when using the sub-components of the STRI (restrictions to foreign entry, restrictions to the movement of people and other service trade restrictions), instead of the single aggregated index value. Based on the estimated impacts of the different restrictions, we carry out a series of simple simulations of how the number of expected FDI projects would increase in response to a hypothetical policy reform, and propose some sector-specific policy recommendations.JRC.B.5-Circular Economy and Industrial Leadershi

Portfolio Selection with Probabilistic Utility, Bayesian Statistics, and Markov Chain Monte Carlo

We propose a novel portfolio selection approach that manages to ease some of the problems that characterise standard expected utility maximisation. The optimal portfolio is no longer defined as the extremum of a suitably chosen utility function: the latter, instead, is reinterpreted as the logarithm of a probability distribution for optimal portfolios and the selected portfolio is defined as the expected value with respect to this distribution. A further theoretical aspect is the adoption of a Bayesian inference framework. We find that this approach has several attractive features, when comparing it to the standard maximisation of expected utility. We remove the over-pronounced sensitivity on external parameters that plague optimisation procedures and obtain a natural and self consistent way to account for uncertainty in knowledge and for personal views. We test the proposed method against traditional expected utility maximisation, using artificial data to simulate finite-sample behaviour, and find superior performance of our procedure. All numerical integrals are carried out by using Markov Chain Monte Carlo, where the chains are generated by an adapted version of Hybrid Monte Carlo. We present numerical results for a portfolio of eight assets using historical time series running from January 1988 to January 2002.Bayesian Statistics, Estimation Risk, Finite Sample, Markov Chain Monte Carlo, Portfolio Selection

Reassessing the Decline of EU Manufacturing: A Global Value Chain Analysis

The declining contribution of EU manufacturing to total GDP and the simultaneous fall of its share in global manufacturing have led to concerns about an overall loss of EU competitiveness, in particular vis-à-vis China. We analyse the empirical evidence underpinning these concerns by applying a newly developed decomposition technique to global input-output data spanning the years 2000 to 2014. In this, we consider both the sectoral and final demand (or value chain) definition of manufacturing. We find, first, that manufacturing’s lower share in EU total value added has generally been exaggerated due to the use of nominal measures, noting that higher-tech manufacturing actually grew in real terms. Second, the decomposition analysis reveals that lower economic growth in the EU relative to the world had the strongest negative impact on the contribution of its manufacturing sector, while shifts in demand patterns exerted a negative (positive) impact for activities with lower (higher) technological content. And third, the observed loss of market shares confirms a downturn of EU manufacturing competitiveness, especially in textiles and electronics, with pharmaceuticals as the only industry showing resilience under external competition.JRC.B.5-Circular Economy and Industrial Leadershi

Productivity Drivers: Empirical Evidence on the Role of Digital Capital, FDI and Integration

There are marked differences in productivity dynamics between countries as well as industries, often leading to substantial performance gaps, such as the gap in labour productivity between the EU and the US. In this article, we use the 2019 release of the EU KLEMS database to look into the drivers of productivity. In particular, we analyse how different types of capital (including intangible capital), foreign direct investment, integration into global value chains and EU integration affect labour productivity. Key findings are that intangible Information and Communication Technology (ICT) capital is a strong driver of productivity both at sectoral and aggregate levels, even more so than tangible ICT capital. Furthermore, backward global value chain integration and EU integration are positively associated with labour productivity. Contrary to expectations, we do not find evidence of a productivity-enhancing effect of foreign direct investment. Finally, we estimate by how much the productivity gap between the EU and the US could be reduced through different ICT investment policies.JRC.B.5-Circular Economy and Industrial Leadershi

EU Exports to the United States: Effects on Employment

The present report contributes to the European Commission’s aim to gather comprehensive, reliable and comparable information to support evidence-based policymaking. The promotion of deeper commercial ties across the Atlantic is key in the European Commission’s strategy to create the conditions for a more dynamic and innovative European Union (EU) economy. This is why the 2015 Communication “Trade for all: Towards a more responsible trade and investment policy" points to the conclusion of the Transatlantic Trade and Investment Agreement as a priority for the EU trade policy. Against this background this reports focuses on the contribution of transatlantic trade to the creation of job opportunities in Europe. For this it offers an ample set of indicators related to the quantification of the employment supported by EU exports to the United States (US). This work builds on the report “EU Export to the World: Effects on Employment and Income” that was published in June 2015 by the European Commission's Joint Research Centre (JRC) and Directorate General for Trade. It is grounded on the same methodology and on the same World Input-Output Database (WIOD) database.JRC.B.5-Circular Economy and Industrial Leadershi

EU Petroleum Refining Fitness Check: Impact of EU Legislation on Sectoral Economic Performance

This report presents the results of the quantitative assessment of the impact on the petroleum refining sector of legislative measures, identified in the process of European Commission's analysis and stakeholder consultations as being of significant relevance for petroleum refineries, and as such included in the mandate of the fitness check. This quantitative assessment took into account the impact of the legislation on costs and revenues of the EU petroleum refining industry and therefore on its capacity to remain internationally competitive. This analysis, mostly of a quantitative nature, was accompanied where possible and relevant by a qualitative assessment in accordance with the Commission's general approach to fitness checks . In particular, the report analysed how coherently and consistently the EU legislation, identified as relevant for the sector, works together, whether it is effective and efficient, and whether it is associated with excessive regulatory burdens, overlaps, gaps, inconsistencies or obsolete measures. Since this fitness check addressed a specific industry sector rather than a policy area, it had a specific focus on the cumulative impact, effectiveness, efficiency and coherence of the measures with respect to the oil refining sector. As stated in the mandate of the fitness check, the analysis in this report was retrospective and concentrated on the impact of the relevant legislation on the petroleum refining sector in the period between 2000 and 2012.JRC.J.5-Sustainable Production and Consumptio