Environmental Standards, Delocalization and Employment: The Case of the EU Cement Industry

CO2 emission reduction is on the political agenda of all developed countries. In this paper we try to assess the impact on one energy – intensive industry, cement, of a likely rise in the cost of pollution permits generated by the new EU cap-and-trade system on emissions (EU ETS). Exploiting the characteristics of the industry (high unit transport costs and homogeneous product), we present a theoretical model of market segmentation for the overall EU regional area. Based on this, we then provide an estimate of the economic effects for the industry of an increase in the production costs due to the full enforcement (auctioning) of the new European ETS system, i.e. in the case of its implementation without free allowances or carbon leakage provisions. We proceed in two steps: first, we estimate the extent to which the increase in environmental costs leads to a substitution of locally produced cement with imports from non EU countries, not subject to the ETS; second, we estimate the impact of this substitution effect on the employment of the industry. We find that in case of full auctioning of allowances the overall impact on employment would be negative, leading to a loss of some 25 % of jobs in the industry. The latter strongly justifies the use of carbon leakage provisions in the upcoming European regulation.