• Cement: An empirical model of regulation


    Nice paper, presented by Mar Reguant in the Environment Economics Seminar at Toulouse School of Economics.

    Market-Based Emissions Regulation and Industry Dynamics

    We assess the long-run dynamic implications of market-based regulation of carbon dioxide emissions in the US Portland cement industry. We consider several alternative policy designs, including mechanisms that use production subsidies to partially offset compliance costs and border tax adjustments to penalize emissions associated with foreign imports. Our results highlight two general countervailing market distortions. First, following Buchanan (1969), reductions in product market surplus and allocative inefficiencies due to market power in the domestic cement market counteract the social benefits of carbon abatement. Second, trade-exposure to unregulated foreign competitors leads to emissions \leakage” which offsets domestic emissions reductions. Taken together, these forces result in social welfare losses under policy regimes that fully internalize the emissions externality. In contrast, market-based policies that incorporate design features to mitigate the exercise of market power and emissions leakage can deliver welfare gains when damages from carbon emissions are high.

    The magnitude of the impact on the price of cement (the second most consumed product on earth after water!) in certain scenarios is huge, and so are the potential general equilibrium effects through the sectors that are big users of cement (think of the construction industry). I can only think of the Paraguayan economy recently grinding to a halt because of the paralysis of its outdated public cement industry and of the ban on imports that fuels so much corruption there. So, I very much look forward the authors’ future research on the topic, which will exploit industrial data on intersectoral linkages to better address this issue.

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