Emission Reductions Post Cap-and-Trade Implementation

2. Forecast the future trend of factors using the vector autoregressive (VAR) model. • Write the VAR model as: • = Ft CF-1B + Ut t • where Ft = [FC02, FECON] - the vector of estimated factors, c is a constant term, and B is a parameter matrix. The lag order of VAR is set to be one, due to the short sample period. We can forecast the future trend of factors using the equation above for periods t = T + 1, ..., T + h.

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