Emission Reductions Post Cap-and-Trade Implementation
.
Use principal component analysis to estimate factors from economic variables and CO2
emissions, respectively.
We follow the principal component analysis of Stock and Watson (2002). Let FECON
denote the factor for XEE and FC02 denote the factor for YC02. The factor model is
ECON
,
i,t
•
Xi,jt
=
FEcon AĘcon
x
+ ejt
•
Yi,jt
FC02 2002 + et
= CO2
where j = 1,...,n, and i = 1, ..., m. e) and et
and et are idiosyncratic errors for xi,jt and
Yi,jt, respectively. The objective function for the estimation of FEcon and 2 Econ is
min
n
FECO con NT Σj=1&l=1(xi‚jt — FЕcon 2Econ)²
FEcon,
and that for FC02 and 1902 is
·
min
CO2 CO2 NT
Σ1Σ-1(Vijt - FC021f02)2
The estimation strategy for Econ and ^ Econ as well as CO2 and 102 can be found in Bai
and Ng (2002).View entire presentation