Hertie School Research Repository
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Decarbonization and EU ETS Reform: Introducing a price floor to drive low-carbon investments
No full textThe EU ETS is in a crisis. There is a fundamental concern that persistently low allowance prices will fail to incentivize the investments in low-carbon capital stock and technology research and development (R&D) required to achieve long-term European decarbonization targets in the context of the Paris Agreement. Attainment of these targets is at risk. Introducing a carbon price floor can re-affirm the role of the EU ETS as the central pillar in the European effort towards decarbonization. Such a price floor should start at an economically significant level and rise over time. Many observers argue that it is misguided to focus on the EU ETS allowance (EUA) price, since the emissions cap determines environmental effectiveness and the allowance market works well in technical terms. Four interrelated considerations underpin our concern over the persistently low EUA price: First, the EU ETS cap is not cast in stone. It might be relaxed in the future if the costs of maintaining it become politically unacceptable. This could be the case if allowance prices escalate, which can be expected to result from a high-carbon capital stock building up in presence of persistently low allowance prices. Second, there is emerging scientific evidence that the EUA price is distorted as the carbon market does not operate cost-efficiently in a long-term perspective due to private sector short-sightedness and regulatory uncertainty. Third, the EU ETS has so far not allowed the effective expression of different climate policy preferences across EU member states. Without compensatory measures, voluntary unilateral emission reductions within member states (e.g. UK carbon price support, potential German coal power exit) dampen short-term allowance prices and shift emissions in space and time. Finally, all ambitious short-term climate policy measures required for embarking on long-term decarbonization pathways face significant political opposition. This opposition can be expected to come not only from reluctant EU member states, but also industry constituencies concerned about impacts on competitiveness, businessmodels and jobs. These distributional challenges need to be tackled more effectively by strategically allocating allowance value, providing limited compensation to adversely affected constituencies, promoting low carbon R&D to reduce future costs of decarbonization, and fostering public support for ambitious climate policy. The recent EU ETS reform effort offers an entry point to tackle these concerns, but does not sufficiently address the underlying problems. The magnitude and direction of its impact on the EUA price is highly uncertain. More fundamental change will be required to reaffirm the role of the EU ETS as the central pillar of European decarbonization efforts. In particular, a carbon price floor that rises over time can provide a clearer policy signal for guiding short-and mid-term capital stock and technology R&D investment decisions towards low-carbon options, and can thus enable cost-efficient achievement of long-term decarbonization targets. If designed accordingly, it allows member states with a higher preference for ambitious climate policy to effectively achieve additional emission reductions. In addition, targeted and transitory compensation models for particularly affected constituencies, and public investments into the development of new technologies and related business models will be required to ensure short-and long-term political support and reinforce policy credibility. Companion policies can play an important role in fostering low-carbon investment, but are
inadequate substitutes to effective long-term carbon pricing. Ideally, a carbon price floor will be implemented at the EU-level. An alternative is to start with a coalition of countries including Germany (also in view of attaining its 2020 climate targets), France and others, and to expand it over tim
Testing the Core‐competency Model of Multi‐product Exporters
No full textWe review the implications of the “core‐competence” model of multi‐product firms, including the “market‐size puzzle”: for most countries, the world market is much larger than the home market, while the costs of accessing foreign markets are relatively low; hence the model predicts that most domestic firms should export more of their core products than they sell domestically; yet, in practice, we do not observe this. Extending the model to allow for investment in export market penetration resolves the puzzle and Mexican data confirm its predictions: in particular, only the largest firms exhibit the dominance of exports over home sales
Competition makes it better: Evidence on when firms use it more effectively
No full textThis paper uses a unique firm-level data set for Mexico, with information never used for research before, to assess how use of information technology (IT henceforth) influences firm performance. Further, the paper explores if, in the context of increasing competition from China, this effect is different for firms more strongly affected by competition where incentives for upgrading and innovation may be more intense. In this perspective, the paper analyzes the complementarity between IT and other changes spurred by competition, taking advantage of the exogenous shock generated by Chinese competition. The results indicate that IT use has higher effects over productivity in the case of firms facing higher competition from China, in the domestic market and in the U.S. market. Furthermore, the paper shows how these changes appear to be driven by complementary investments in innovation and organizational changes
Trade as an engine of creative destruction: Mexican experience with Chinese competition
No full textThis paper exploits the surge in Chinese exports from 1994 to 2004 to evaluate the effects of a competition shock from a low wage competitor for producers in an important middle-income country, Mexico. We find that this shock causes selection and reallocation at both firm and product levels and that its impact is highly heterogeneous at the intensive and extensive margins. Sales of smaller plants and more marginal products are compressed and are more likely to cease, whereas those of larger plants and core products seem relatively impervious to the shock. This implies a reallocation in terms of market shares within firms and between firms. We also show that the impact of expanded access to cheaper Chinese intermediate inputs has a similar effect, with larger plants benefiting more from the availability of cheaper imported inputs
Innovation responses to import competition
No full textHow does trade liberalization that raises a country’s import competition affect the innovative activity of its firms? We exploit the strong growth of Chinese exports resulting from China’s entry into the World Trade Organization in 2001 as a competitive shock to, specifically, Mexican manufacturing firms. Innovation is captured through information on the adoption of detailed firm level production techniques such as just in time inventory methods, quality control measures, and job rotation among the Mexican firms. Our results indicate that China’s rise in global trade did not affect by much Mexico’s rate of innovation, which contrasts with the substantial gains that others have found in the case of bilateral iberalizations. At the same time, there is a striking heterogeneity in the responses across firms for different productivities, with productive firms innovating more and less productive firms innovating less, which leads to positive selection in that initial differences in firm performance are sharpened by the advent of new competition. We discuss the implications of these findings for theories of trade and innovation
Robots at the Tropics
No full textIn recent years, a growing concern has emerged regarding the potential effects of Artificial Intelligence (AI) and robotization on firms, and even more specifically on workers and the risks for their displacement (Brynjolfsson and McAfee, 2014; Acemoglu and Restrepo, 2017; Graetz and Michaels, 2015, among others). The emphasis of current research studies has been driven by the rapid decrease in the prices of robots, that according to Graetz and Michaels (2015) fell by 2005 to one fifth of its 1990 level adjusting for quality. Consequently, utilization of robots has increased in a wide range of different industries, with the operational stock of robots doubled between 2005 and 2016, reaching 1,828,024 units by the end of 2016 and expected to reach three millions by 2020 (International Federation of Robotics, 2017).
The evidence on the impact of robots on the global economy is still very limited and the results of recent studies exhibit great differences. For example, while Frey and Osborne (2017) indicate that the number of jobs that are in risk of automation could account for around 50%, Arntz et al.(2017) argue that this figure is overestimated due to the fact that the heterogeneity of tasks within occupations is not considered, which would reduce this number to around 9%
Participating or Not? Characteristics of Female Entrepreneurs Participating in and Completing an Entrepreneurial Training Program
No full textWho are the female entrepreneurs who end up starting and completing entrepreneurial training programs? In this paper, relying on a large set of baseline characteristics collected before the entrepreneurs are selected into an entrepreneurial training program in Mexico, we analyze how the women entrepreneurs who complete the training program differ from those who do not take it up, as well as how those who take it up but drop off before completing differ from those who do not even start. We uncover large differences in performance and non-cognitive skills but no differences in inputs used
