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

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 ${\text{CO}}_2$ 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 ${\text{CO}}_2$ 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 ${\text{CO}}_2$ 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.