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European sectoral analysis
The expansion of the European Union to 27 members in 2007 increased the number of consumers in the single market to 490m. The effects of enlargement since 2004 have been far-reaching, in both the economies of the new member states and the previous EU15 countries. Companies across the EU benefited from a larger market for export goods, and some of the EU15 economies benefited from a supply of relatively cheap labour. However, particularly in manufacturing, many traditional industries in the EU15 have struggled to compete against lower-cost producers in the new members. The effects of the recent financial and economic crisis demonstrated the depth of European integration in product, labour, financial and capital markets.
CE provides an in-depth analysis of competitiveness in the European economies by splitting production into 42 industries (including 16 service sectors) and examining the complex interactions between these industries, their relationships with the wider economy, and the trade of goods and services across the EU members and with global markets. This analysis extends to cover labour market issues and environmental concerns, allowing us to offer a fully-integrated approach to policy analysis and impact assessment.
The analysis makes extensive use of the E3ME model and its detailed databases. E3ME is based on the European System of Accounts (ESA95) and provides the sectoral disaggregation described above in each of the EU27 member states. It is therefore ideally suited for industry level analysis and can capture inter-industry effects that would not be present in more widely-available macroeconomic models. E3ME is made up of 33 sets of estimated equations, covering the components of GDP, the labour market, prices, energy and material demands, with separate behavioural relationships for each industry and country estimated using robust econometric techniques. The historical database covers the period 1970-2008 and the model produces annual forecasts to 2050. More information about E3ME can be found here and, with appropriate training, the model is available for licensed use.
In addition to formal modelling, CE offers a flexible approach to econometric assessment based on the latest techniques. This allows an even more detailed means of assessment than that offered by E3ME, although it lacks the feedbacks effects that are present in the model. For this type of analysis a combination of E3ME and this direct estimation offers a comprehensive approach to detailed sectoral analysis.
Tools and competence
CE specialises in the application of detailed sectoral modelling covering the whole economy and distinguishing the separate member states in the EU in order to gain an improved understanding of the nature of structural change in the European economies and the potential impact of sectoral policies. Specifically we offer:
- a long-standing reputation for sectoral modelling, having its origins in the work of the nobel laureate Richard Stone whose work underpins the international system of national accounts
- the E3ME model, one of Europe's leading macroeconometric models with substantial sectoral detail
- our experience in using E3ME to produce forecasts and policy scenarios for the European economies
- our expertise in advanced econometrics to gain insights from highly disaggregated data sets
- our knowledge and experience in studying sectoral change in Europe
Examples of our work
A list of publications is available here.
Economic Analysis of NOx and SO2 Emission Trading for Impact Assessment
European Commission (DG Environment)
This study was carried out by a consortium led by Entec and including Cambridge Econometrics and the Regional Environmental Centre (REC). Its undertook an economic analysis of the introduction of an emissions trading scheme for IPPC installations emitting NOx and SO2. Cambridge Econometrics' role was to provide quantitative economic analysis at the sectoral level through the application of the E3ME model. The inputs to the model were the expected changes in industry cost structure in response to the trading scheme and the model supplied results for GDP and its components, sectoral output, price impacts, labour market effects and impacts on household income distribution. The results from the project were used as an input to an Impact Assessment of the possible introduction of a European trading system.
Analytical Report Assessing the Outcome of the Copenhagen Agreement with Regard to Energy-Intensive Sectors
European Commission (DG Environment)
This project was carried out by Entec (UK), CE and the Regional Environmental Center (Hungary) on behalf of the European Commission's Environment Directorate General. The study was undertaken in the context of the COP15 Copenhagen summit and its aims were: to assess whether (a) an international agreement might lead to high levels of carbon leakage; and (b) whether any carbon leakage could be offset by domestic EU policy. The project combined disaggregated (NACE 4-digit) level analysis and complex macroeconomic modelling. CE's role within the project was to carry out the econometric analysis and provide modelling expertise through the application of the E3ME model.
Studies on Sustainability Issues - Green Jobs; Trade and Labour
European Commission (DG Employment)
This study was carried out by a consortium led by Cambridge Econometrics and including the Warwick Institute for Employment Research (IER) and GHK Consulting. The objective was to assess the likely impacts of current climate change policy on the composition, quality and quantity of employment. This included a quantitative analysis of both short-term transitional impacts and longer-term trends. Having gained a better understanding of these impacts, the study then considered how policies could be designed to address the challenges that the European labour market faces in the context of policies intended to achieve large reductions in greenhouse gas emissions.
The methodology was based on representation of the various policies in the E3ME model, allowing for a quantitative analysis of the environmental, economic and social impacts of climate change policy. The focus of the analysis was on labour market outcomes, with results going far beyond simple changes to aggregate or sectoral employment levels. The model-based analysis was supplemented with a qualitative assessment of issues that could not be represented in the modelling framework, for example impacts on particular vulnerable groups such as the young, elderly, low-skilled or less mobile.
Scoping Study on the Macroeconomic View of Sustainability
European Commission (DG Environment)
This project was carried out on behalf of DG Environment by a team led by Cambridge Econometrics and including the Sustainable Europe Research Institute. The aim of the project was to assess the ways in which existing economic models could be used to evaluate sustainable development strategies and how current models could be improved on to provide a better representation of sustainability issues. The focus of the study was the links between economic growth and the demand for finite or pollution-intensive resources, and how macroeconomic policy could be used to enhance economic welfare while at the same time reducing environmental degradation. The final outcome of the study was a report assessing the feasibility of adapting existing groups of models to provide a more complete assessment of the EU's Sustainable Development Strategy.
The Revision of the Trans-European Energy Network Policy (TEN-E)
European Commission (DG TREN)
This project was carried out by CE and an independent consultant on behalf of the European Commission's Directorate General for Transport and Energy. The aim of the study was to provide a comprehensive assessment of Europe's future needs for energy infrastructure and how close current capacity would be to meeting these needs. The project was split into four parts, which: (1) provided baseline forecasts for energy demand and supply; (2) estimated the amount of future infrastructure investment required to match supply with demand; (3) assessed how much of this would be met under a business-as-usual scenario; and (4) assessed how much of this would be met under alternative funding arrangements. CE provided overall coordination for the project and used the E3ME model to forecast energy demand and assess the impacts of future investments.
Forecasting Skill Supply and Demand in Europe
European Commission (CEDEFOP)
This four-year project is providing the framework for a series of studies looking in depth at the roles that skills play in shaping European labour markets. The studies are being carried out on behalf of the European Centre for the Development of Vocational Training (CEDEFOP) and the team members include the Institute of Employment Research (IER) at the University of Warwick, the Research Centre for Education and the Labour Market (ROA) (Maastricht) and Alphametrics (Brussels). CE's contributions focus on the links between labour demand and supply and the wider economy, as represented in the structure of the E3ME model.
The project framework is structured into core and additional elements. The core studies build on the initial forecasting exercises of the demand for and supply of skills in Europe carried out in an earlier study by CE, IER and ROA. The original methodologies are being assessed and, in some aspects, improved upon. More recent data are being incorporated so that revised sets of projections can be produced. The additional studies expand the area of research to assess further interactions between skills development and economic activity, and the possibility of modelling these. For example, using E3ME, CE is carrying out a study examining the links between skills and technological development.
Framework for Sector Competitiveness
European Commission (DG Enterprise)
This framework project, led by ECORYS of the Netherlands, produced 27 sector-specific studies that researched and analysed the structural and micro-economic factors affecting the competitiveness of the specified sectors in the EU for the European Commission (DG Enterprise). As a sub-contractor CE undertook the desk-based study of several sectors. CE also led on some of the sector studies. For each sector the work involved 1) the collection and presentation of data to provide a representation of the main structural features of the industry being studied; 2) a review of the existing business and academic literature to provide a synthesis of the 'state of knowledge' on the challenges, conditions and strategies in relation to a sector's competitiveness; 3) hence, assessing and explaining the competitive position of the sector; 4) assessing the regulatory and other framework conditions that influence the development of the sector and business performance; and 5) developing a medium to long-term strategic outlook for the sector to identify the main implications for industrial policy and investment policy to maximise future competitiveness. These tasks were completed in conjunction with other collaborators. The work was therefore intended to help the European Commission to better understand the unique factors that shape and drive individual sectors, and to gain an understanding of the key themes at a broader industry level and so support the development of a coherent and integrated approach to industrial policy.
European emission projections
UK Carbon Trust
This project developed a set of CO2 emission projections in Europe over the period up to 2020 in the context of the volatile energy prices experienced in 2008. Working with the Carbon Trust and Climate Strategies in the UK, a set of scenarios were designed in which high fossil-fuel prices in 2008 were viewed as a one-off increase which persisted in the long term. In addition, the impacts of somewhat lower rates of economic growth were considered. The scenarios were implemented in CE's E3ME model of the European economies
Results were examined in the context of Phases II and III of the European Emission Trading Scheme and used to estimate possible shortfalls and surpluses of allowances in the period up to 2020. At a national level the results over 2008-12 were compared with Member States' commitments to the Kyoto protocol, to see if the impacts of changes in energy prices affected the likelihood of these targets being met. The report is published on the Carbon Trust website here.
The Usefulness of Estimating Sectoral Price Elasticities
European Commission (DG Enterprise)
This project investigated the ability of European energy-intensive industries to pass on cost increases that result from the implementation of the EU Emission Trading Scheme. The work involved a literature review of methodologies for the estimation of demand price elasticities to identify the most suitable approach for the case of cost pass-through in response to the EU ETS. The selected methodology was then applied to four case studies of NACE3/4 energy-intensive sectors to estimate the price elasticities. The results were used to develop a medium to long-term strategic outlook for energy-intensive industries in the EU.
Meta-Evaluation of Macro-Financial Assistance Operations
European Commission (DG Ecfin)
This project produced an assessment of the methods used by the European Commission and its contractors to evaluate the impacts of Macro-Financial Assistance (MFA) given to third-party countries in Eastern Europe and the Balkan states to support their balance of payments and national budgets. The tasks were led by GHK (London). Cambridge Econometrics' role was to assess the econometric modelling tools used in the original evaluations. For each of the seven countries in the study the suitability of the models that were used was assessed in terms of basic structure and assumptions, data, econometric methods and baseline assumptions. In each case, recommendations were made about possible methodological improvements.
The implications of environmental tax reform in Europe for the environment, eco-innovation and household distribution
European Environment Agency
This project framed options for environmental tax reform (ETR) drawing on EU Member States' experiences with ETR and eco-innovation. The study involved the following broad tasks: an assessment of how eco-innovation technologies and services were likely to respond to a substantial shift over the coming decades of the tax base away from labour and towards the environment as a result of ETR; an analysis of the role of complementary public policies; an assessment of the distributional implications of any prospective ETR and how it might affect vulnerable groups in the population such as pensioners, the unemployed, and low income households in general; and lastly an appraisal of the legal feasibility and political acceptability of a radical ETR within the broader context of EU policies. CE's role in the project was to apply its Energy-Environment-Economy model of Europe (E3ME) to evaluate the distributional implications for households (split by income, employment status and rural-urban location) of a broad-based ETR as this issue is clearly one of the main challenges to political acceptability of any such reforms: increases in environmental taxes are often thought likely to fall disproportionately on low-income and rural households.
Review of the Energy Taxation Directive
European Commission (DG TAXUD)
This study had two objectives: firstly to develop various options to restructure the minimum levels of taxation for energy products and electricity as set out in the Energy Taxation Directive leading to a development of various policy scenarios; and secondly to assess the economic, social, environmental and energy impacts of such policy options for EU27 member states by means of macro and micro-economic modelling.
CE used E3ME to model the Europe-wide economic and environmental impacts of different energy taxation regimes. The modelling work involved producing a baseline projection to 2030, supplemented with detailed energy tax rates, which drew upon data from the DG TAXUD databases and other recognised sources. Scenarios were then developed within the E3ME modelling framework to assess the impact of various policy options over the period up to 2030. The scenarios were based on three core options: maintaining or increasing the values of minimum levels of taxation; removing distortions to competition between energy products that current minimum levels of taxation could generate; and, lastly, dividing the minimum levels of taxation into environmental and energy components. Scenarios were also designed that met the other objectives of the study, namely, the analysis of the effects of removing tax distortions between different fuels and between different consumers of fuels. CE's modelling also addressed the interaction of the Energy Taxation Directive with the EU ETS and other EU instruments as this was important in assessing the issue of double taxation.
Petre
Anglo-German Foundation
This project aimed to build upon the work in the COMETR project by looking at the competitiveness effects of environmental tax reform in the UK and Germany. E3ME was used in tandem with the GINFORS model (a global econometric model) to analyse the impacts of environmental tax reform on the Foundation's three core themes of its general research topic (‘Creating Sustainable Growth in Europe’), namely: innovation, productivity and growth; environment and resources; and welfare, employment and social justice. The project website is http://www.petre.org.uk/
Updating the IA TOOLS Energy-Environment Model Inventory Database
European Commission (DG JRC - IPTS)
This project was carried out on behalf of the Institute for Prospective Technological Studies, part of the European Commission's Joint Research Centre. It involved the update and revision of the model inventory part of the IA TOOLS database, which provides a description and assessment of the various quantitative economy, energy and environment modelling tools used in Europe to the Commission services.
The project was split into two tasks: the first of these was to update the information held within the database to take into account recent developments and new modelling tools and the second was to provide recommendations for changes to the structure of the database, including new chapters on data collection and input-output analysis and better links to other parts of the IA TOOLS database. A key part of the work was the collection of detailed technical information and the presentation of this in a way that allowed comparison between the modelling tools involved and was accessible to users within the Commission who may not have an in-depth experience of modelling.
MATISSE
Research Directorate General, European Commission
The objective of MATISSE was to achieve a step-wise advance in the science and application of Integrated Sustainability Assessment (ISA) of EU policies. In order to reach this objective the core activity of the MATISSE project was to improve the tool kit available for conducting Integrated Sustainability Assessments. E3ME is seen as one of these tools and provides a key input to the energy-environment modelling from the perspective of economic and technical progress. In addition the model was expanded to include an assessment of physical material demands and this was integrated into its existing E3 structure, allowing two-way interactions between the economy, the environment and demand for energy and material inputs.
The project website is http://www.matisse-project.net/projectcomm.
Economic, social and environmental impacts of possible changes to the EU Emissions Trading Scheme
Environment Directorate General, European Commission
This project provided analytical and modelling support to the European Commission through an assessment of the economic, social and environmental impacts of possible changes to the EU Emissions Trading Scheme (EU ETS). The objectives were twofold: to support the European Commission in its consideration of proposed modifications to the Directive 2003/87/EC that established the EU scheme for emissions allowance trading in January 2005 and, secondly, to provide the technical, practical and legal framework for any changes in the Directive that the Commission might wish to present to the European Parliament and Council.
The list of modifications to the EU ETS considered were: first the expansion of the scope of the Directive to cover, for example, small installations and other installations, and to other sectors and gases; second, changes in the allocation mechanism moving away from grandfathering of allowances to auctioning and benchmarking and modification in the treatment of new entrants and closures and the extent of harmonisation envisaged; third, changes to the rules for setting the total quantity of allowances; and lastly alterations to the rules for compliance, enforcement and verification and mutual recognition of verifiers between member states. The project addressed the main problems revealed during the operation of the Scheme over 2005-06 including the lack of a stable and/or gradually increasing emissions allowance price that would give a clear incentive to cost-effective CO2 reduction across the EU.
R&D Scenarios
Joint Research Centre Directorate General, European Commission
This project analysed the effects of increased R&D spending across Europe in the context of the Lisbon Agenda. The E3ME model was used to assess the macroeconomic and industry-specific impacts of increased R&D spending in each of the EU-25 countries over the period 2005-20. A number of model runs were carried out using E3ME, to reflect different scenarios for R&D spending. The baseline case assumed that R&D as a share of GDP remained constant over the period 2005-20; other scenarios assumed that the Lisbon targets (R&D equalling 3% of GDP by 2010) or similar national targets were met.
Links between the Environment and the Economy and Jobs
Environment Directorate General, European Commission
This study provided estimates of the number of jobs and the value of the related economic activity that is dependent on the environment in Europe, and explored the factors behind these links. It covered all economic activity for which the environment is an input into production or an output to the market, whereas earlier studies had typically adopted a more narrow definition covering waste, waste water, and air pollution control as the main areas, and contaminated land remediation and monitoring and instrumentation as other, less significant areas. The project was led by GHK Consulting Ltd and also includes the Institute for European Environmental Policy (IEEP).
Competitiveness Effects of Environmental Tax Reforms (COMETR)
Tax Directorate General, European Commission
This EU Sixth Framework, policy-oriented research project had as its objective the aim of assessing the short and long-term costs of environmental tax reform. The project undertook a comprehensive sectoral analysis of green tax reforms from an ex-post perspective based on actual experience rather than uncertain ex-ante expectations. A modelling framework (bottom-up and macro-economic) was developed in the study, augmented by detailed case studies of existing tax reforms that have already been implemented in the EU and candidate countries in Eastern Europe. Short-run impacts were examined by a conventional bottom-up modelling framework. Meanwhile a more dynamic modelling framework was developed using CE's E3ME model to examine both the short and long-term effects with particular emphasis on competitiveness. Inter-industry and other indirect effects were captured as well as those international competitiveness effects which cannot be readily accounted for using the bottom-up approach.
Emission Allowance Trading Schemes in Sweden
Environmental Accounts, Statistics Sweden
This project undertook an analysis of the impact on the economy and on environmental emissions of the introduction of CO2/greenhouse gas emission (GHG) allowances for Sweden using the E3ME model. The analysis compared the effects of carbon taxes with those of tradable emission allowances, and the effects of grandfathering versus auctioning of the allowances. The study also examined the implications of alternative methods of recycling the tax/allowance revenues, noting the impacts on different parts of the economy and the extent of any ancillary environmental benefits associated with the GHG emission reductions. The project was undertaken in close collaboration with the Environmental Accounts team of Statistics Sweden, who contributed to the design of the scenarios to model emission allowance schemes and the incorporation of the latest available Swedish Environmental Economic Accounts.
Socio-Economic Analysis and Macro-modelling of Adapting to Information Technologies in Europe (SEAMATE)
Information Society and Media Directorate General, European Commission
This project analysed the overall economic impact of Information Society Technologies (IST) within the context of the EU and national policies. It made estimates, for the first time at an EU level, of the socio-economic impact of IST on the EU-15, Norway and Switzerland founded on a dynamic macroeconomic analysis covering the EU countries and Switzerland with detailed treatment of industrial sectors. It assessed the impacts on industry and on households. The project, which lasted for two years, built on, what was at the time rather limited, work which has been done at the national (UK, Australia) and international (IMF, MULTIMOD) level. It was undertaken by a consortium of eight institutions across Europe. CE's role was as co-ordinator for the overall project as well as in leading the work focused on macroeconomic modelling for the individual economies in Europe using E3ME. The research included an analysis of the interplay between a broad range of technologies and the socio-economic structure of the EU regions, separating the social and economic impacts of IST and then modelling the consequences of these impacts on different sectors of western European economies.
TIPMAC
Energy and Transport Directorate General, European Commission
TIPMAC was a project developed by a consortium of macroeconomic and transport models of Europe whose objective is to assess the role of transport in macro-economic development and employment. The methodology was to perform two parallel analyses. In one analysis, a transport model for the EU, the SCENES model was linked to the E3ME model to perform a number of transport scenario analyses. In the other, the ASTRA model ran similar scenarios, to provide an independent source of results and a regional economic assessment.
As E3ME provides a fully dynamic macroeconomic analysis of the EU (including individual industrial sectors), the different implications of transportation cost changes for different sectors can be identified. E3ME also provides consumer spending and results on spending by different household social groups, so that equity and welfare impacts could be studied. The SCENES model provided the detailed model of the transport sector that is lacking in previous macroeconomic analyses. The main model development tasks were to match the accounting and zonal structures of the data in the two models. The SCENES model provided transport price/cost information for input into the E3ME model, while the E3ME model provided economic demand information for input into the SCENES model. Thus the macroeconomics were based on a much more comprehensive modelling procedure than is found in transport models, while the transport sector analysis was in much greater detail than has been found in other macroeconomic studies.
For more information contact
Hector Pollitt
Associate Director, International Modelling