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Industry-Level Emission Trading in the EU

Appendix A: Algebraic Appendix

This appendix provides an algebraic summary of the equilibrium conditions for our
comparative-static model. The model has been designed to investigate the economic
implications of alternative EU emission abatement strategies under the Kyoto Protocol.
Before presenting the algebraic exposition we state our main assumptions and introduce
the notation.

Nested separable constant elasticity of substitution (CES) functions characterize the use of
inputs in production. All production exhibits non-increasing returns to scale. Goods are
produced with capital, labor, energy and material (KLEM).

A representative agent in each region is endowed with three primary factors: natural
resources (used for fossil fuel production), labor and capital. The representative agent
maximizes utility from consumption of an CES composite which combines demands for
energy and non-energy commodities. Supplies of labor, capital and natural resources are
exogenous. Labor and capital are mobile within domestic borders but cannot move
between regions; natural resources are sector specific.

All goods are traded internationally and differentiated by region of origin (Armington
1969).

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