Carbon Abatement and the Location of Cement Production

Abstract

The location of energy-intensive industries and their associated emissions plays a key role in the climate policy debate. The models addressing this issue typically assume constant returns to scale in production and use the Armington assumption to differentiate energy-intensive commodities according to origin. I propose an alternative model with increasing returns to scale and imperfect competition in the cement industry and compare it with an Armington-style model. I apply the models to an analysis of carbon abatement in the EU, and the results suggest that the Armington model may significantly underestimate relocation of the cement industry. The higher relocation of production and emissions comes with larger trade effects, and this implies that trade in cement is a better substitute for trade in emissions in the alternative model.