Francesca Sanna-Randaccio paper - The Business School

million Euro for a 1 million ton plant. 9 Furthermore the average operating time of a plant is
estimated to be 30 years. 10 Cement production is also characterized by high transport costs as
compared to unit value. Transport costs from Northern Africa or the Eastern European countries
outside the EU to Antwerp have been estimated to reach 36% of unit variable production costs 11 ;
then markets are served largely via local production. In 2006 trade of cement and clinker (the
primary input to cement) represented only 7% of world cement consumption. 12
We argue therefore that fixed plant costs, transport costs and market size asymmetry are
essential components of a model analyzing firms’ responses to unilateral climate actions.
3. The model
We present a two-country, two-firm international oligopoly model. 13 Two groups of
countries are considered: the first one consists of the cooperating nations that implement stricter
mitigation measures (labelled country I) and a second group is formed by the non-cooperating
countries (henceforth country II). The international oligopoly is formed by two firms (firm 1 and
firm 2), which manufacture the same homogeneous good 14 in country I and II respectively. Firm
1’s location strategy is endogenously determined by the model, while for simplicity firm 2’s
international strategy is given, as this firm may only export to the foreign market. 15
Let us assume that country I sets a more stringent regulation on pollution emissions as
compared to country II, introducing a pollution tax t I t II , where t II represents the common
price of emissions in the two areas before the new measure is introduced. 16 Such policy may have
different repercussions on firm 1’s location strategy.
Firm 1’s location strategy space is given by S NR, PR,
TR
1 . The firm chooses “no
relocation” (NR), when it continues to produce in the home country and to serve the foreign
market via export; 17 in this case the tighter pollution tax has no impact on firm 1’s location
choice. If, on the contrary, there is a shift of production abroad, this may be either partial or total.
There is “partial relocation” (PR) if the environmental measures stimulate the local firm to
substitute export with foreign production, leading to a partial shift of production abroad. The firm
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