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

E. Allevi, G. Oggioni, R. Riccardi () and M. Rocco
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E. Allevi: University of Brescia
G. Oggioni: University of Brescia
R. Riccardi: University of Brescia

Annals of Operations Research, 2017, vol. 255, issue 1, No 5, 63-93

Abstract: 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.

Keywords: Cement sector competitiveness; Complementarity modeling; EU-ETS; Generalized Nash game; Long-term power contracts (search for similar items in EconPapers)
JEL-codes: C60 C61 D43 D58 Q50 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s10479-016-2200-x

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