A Spatial Competitive Analysis: The Carbon Leakage Effect on the Cement Industry Under the European Emissions Trading Scheme
47 Pages Posted: 21 Feb 2013
Date Written: January 30, 2013
The European Emissions Trading Scheme (ETS) is a cap and trade system to curb CO2 emissions. It has caused both direct costs (CO2 allowances) and indirect costs (higher electricity prices) to energy-intensive industries. Moreover, as there is no global CO2 agreement, the ETS could distort the European economy, prompting energy-intensive industries to relocate production to unregulated countries: the “carbon leakage” effect. This paper investigates the impact of ETS on the cement industry, focusing on Italy, the second European producer, analyzing a Cournot oligopolistic partial equilibrium model with a detailed technological representation of the market. Simulation results show that the European and Italian cement markets are subject to carbon leakage, especially where carbon regulation is more stringent and where plants are located near the seacoast. Further, transportation costs - particularly high in the cement sector - significantly affect the rate of carbon leakage.
Keywords: carbon leakage, cement sector, ETS, generalized Nash game
JEL Classification: C60, D43, D58, C61, Q50
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