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An equilibrium model for the cement sector: EU-ETS analysis with power contracts

Author

Listed:
  • E. Allevi

    (University of Brescia)

  • G. Oggioni

    (University of Brescia)

  • R. Riccardi

    (University of Brescia)

  • M. Rocco

Abstract

The gradual relocation of part of the energy-intensive industries (EIIs) outside of Europe is one of the possible consequences of the combination of emission charges and higher electricity prices entailed by the EU-Emission Trading System (EU-ETS). The geographical distribution of cement plants is a relevant factor in relocation decisions because cement sector is characterized by high transportation costs. In order to mitigate this effect, EIIs have asked for CO $$_2$$ 2 allowance grandfathering and long-term power contracts whereby they would be supplied from dedicated power capacities at a lower price. We model this situation on a prototype cement international market calibrated on ETS regulated and unregulated countries, with a particular focus on the Italian market. The analysis is based on an oligopolistic partial equilibrium model with a detailed technological representation of the whole production process. The model is a Generalized Nash game that accounts for the interactions of cement companies. In particular, we investigate the role played by the transportation costs in the clinker/cement production relocation and evaluates the effectiveness of CO $$_2$$ 2 allowance grandfathering and of the application of long-term power contracts in mitigating this phenomenon. To this aim, we conduct empirical experiments taking into account different transportation costs and progressively higher CO $$_2$$ 2 allowance prices with and without long-term contracts. Our results show that the European and Italian cement markets are affected by the EU-ETS and react by importing clinker from unregulated regions. Both allowance grandfathering and long-term power contracts only partially mitigate this relocation phenomenon.

Suggested Citation

  • E. Allevi & G. Oggioni & R. Riccardi & M. Rocco, 2017. "An equilibrium model for the cement sector: EU-ETS analysis with power contracts," Annals of Operations Research, Springer, vol. 255(1), pages 63-93, August.
    • Handle: RePEc:spr:annopr:v:255:y:2017:i:1:d:10.1007_s10479-016-2200-x
    DOI: 10.1007/s10479-016-2200-x
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    References listed on IDEAS

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    Cited by:

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    2. Sadayuki, Taisuke & Arimura, Toshi H., 2021. "Do regional emission trading schemes lead to carbon leakage within firms? Evidence from Japan," Energy Economics, Elsevier, vol. 104(C).

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    More about this item

    Keywords

    Cement sector competitiveness; Complementarity modeling; EU-ETS; Generalized Nash game; Long-term power contracts;
    All these keywords.

    JEL classification:

    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General

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