Within the past year, both European and U.S. officials have investigated the cement industry for price collusion, anti-trust issues and other unfair business practices. Now, new studies from environmental consultants CE Delft and Sandbag say LaFarge-Holcim, HeidelbergCement Group, Cemex and others made billions of dollars passing through costs of carbon pollution limits to customers—mostly concrete mixers and contractors—even as they received credits for free.

The cement suppliers vigorously deny it, saying they have not profited from or manipulated the carbon market.

Under cap-and-trade markets, a country or state imposes a cap on carbon dioxide emissions for heavy industry but allows the obligated parties to buy or trade compliance credits when their emissions exceed limits. But under the European Union’s emissions-trading scheme (ETS), manufacturing sectors such as steel, cement and fuel often receive allowances—free of charge—to keep their producers from relocating to countries with fewer environmental regulations.

Carbon Market Watch, an advocacy group which says it fights for fair climate protection, commissioned the CD Delf study and claims cement suppliers abuse the allowance system. Big Cement has used the “myth of carbon leakage” to convince officials who manage the world’s emissions-trading markets to give away free credits in what one critic calls “crony capitalism run amok.” From 2008 to 2014, the cement sector received enough surplus allowances to cover 2.2 years of additional emissions without buying a single credit, says Wilf Lytton, policy analyst for Sandbag, a U.K.-based environmental advocacy group committed to reduced emissions from fossil-fuel combustion.

Sandbag says cement’s “carbon fat-cat companies” received over $1 billion worth of spare EU allowances between 2008 and 2014. Meanwhile, emissions from the sector actually increased, Lytton tells ENR.

Not only that, but cement companies still raised prices as if they had to pay. “There is ample empirical evidence that companies have been able to pass through (part of) the carbon costs in product prices,” said the study by CE Delft, based in the Netherlands. “Although the allowances were granted free of charge, the majority of sectors were thus able to pass through the opportunity costs of these allowances in product prices.”

European Commission authorities say they are monitoring the situation and holding the cement industry under close scrutiny. But it isn’t just an EU issue: European companies own 60% of U.S. production capacity.

And for contractors, increases in the cost of cement are likely as more governments introduce pollution restrictions tied to carbon markets. Following the United Nations climate-change guidelines signed in Paris in December, Ontario launched a cap-and-trade system that will be linked with other North American markets already established in Quebec and California.

Further, China has announced the implementation of its own cap system, which experts say could quickly become one of the largest carbon-credit trading markets in the world. So far, carbon prices have remained low, but the proliferation of new markets mean prices should start to rise steadily, Lytton says.

But, so far, the EU’s cap-and-trade program—the world’s oldest and largest—has not been working as planned, say critics. CE Delft even called certain provisions in the ETS “perverse,” saying most producers, for instance, keep production levels falsely high to sustain the number of free credits they receive. More production means an increase in emissions—exactly what the ETS is meant to stop.

The cement suppliers say, however, this analysis is flatly mistaken. “The allegations that the ETS has incentivized overproduction are based on thin air and do not acknowledge the strides the cement sector has made through investments in the reduction of its CO emissions,” said CemBureau, Europe’s trade association for cement- makers, in a statement. “The recurring mantra on over-allocation ignores the fact that the cement industry has always called for an allocation closer to production and will continue to do so.”

Pricing Power

Sander de Bruyn, lead author on the CE Delft study, said the extent to which producers are able to pass on carbon costs depends on their political status in international markets and “their bargaining power vis-à-vis customers and suppliers.”

As an oligopoly, the cement sector has bargaining power, de Bruyn said. EU officials even investigated for more than a year, during 2014-15, the cement sector on suspicion of price colluding but closed the investigation in November as being “inconclusive.”

In North America, ENR sources have said local cement markets are often dominated by one global firm—such as LaFarge-Holcim in Ontario—and, before the companies’ merger last year, the U.S. Federal Trade Commission required each firm to divest a number of assets, fearing anticompetitive behavior. By itself, LaFarge Holcim represents 15% of global cement sales.

John Dunlap, an environmental consultant for the Associated General Contractors of California, says the bid process protects contractors and mixers from cost pass-throughs; but because almost 30% of cement is bought on the spot market, a contractor that hasn’t locked in a price could be paying for price mark-ups related to non-existent carbon costs.

A European Commission-funded study, performed by CE Delft and the German environmental think tank Öko-Institut, said, “If the spot market would, for example, constitute 30% of cement sales, it could be the case that cost pass-through for the spot market was 100%,” which would translate into a sector-wide cost pass-through rate of 30%.

Production of additional units beyond contracts demand the highest prices, de Bruyn said. If capacity is fully used, full cost pass-through is more likely, he noted. With carbon trading at about $5.60 according to Reuters, cost pass-throughs would be similar in the per-ton price of cement in spot purchasing scenarios.

CemBureau argues that, since the financial crisis of 2008, demand has not supported the practice. “Cement producers in Europe appear to be price-takers with nil pass-through,” CemBureau said. “In spite of increasing energy costs, the industry has not been able to adjust prices forward. If some pass-through rate were applied, it would result in a loss of market shares.”

Not all cement firms engage in opportunity pricing, but if only one firm pushes costs through, it sends a signal to competitors that they, too, can raise prices, CE Delft said. “If most firms are price-takers, then only one company can have a big influence because it sends signals to the whole sector. The problem is that cement price information is very sparse, and there isn’t a [price reporting] benchmark,” de Bruyn said. “So, firms follow what they hear from each other.”

Innovation or Not?

Cement manufacturers say they’ve been at the forefront of increasing the liquidity of carbon credits and implementing state-of-the-art emissions-reduction technologies. A 2015 Environmental Defense Fund report, citing John Bloom, economist for Cemex, noted that cement firms are working with infrastructure managers to make decisions based on carbon life-cycle analyses, installing windmills and using biofuels to power their plants, and investing in carbon capture and storage technologies.

Some researchers, however, think the cement industry has shown little interest in pursuing the development of alternative manufacturing processes and materials. Gaurav Sant, professor at the University of California, Los Angeles’ California NanoSystems Institute has made advances in reducing the carbon footprint of cement manufacturing, he says, but producers will have to be taxed much more heavily before they start to invest.

“Carbon prices will need to be near $100 per ton for cement producers to really start to change,” Sant tells ENR. “That’s big money and would make innovation very attractive, but carbon is trading between $12 per ton and $13 per ton in California now.”

Cement manufacturing is an energy- intensive process in which limestone is broken down and heated with other compounds to temperatures that reach past 1,500°C. Sant and his team say they’ve developed a “closed-loop” concept in which carbon dioxide given off in an early stage of the process can be captured and reused downstream in a later manufacturing step.

Most cement plants’ carbon-reduction success has been on the back end, with alternative-fuel usage; few gains have been made in the use of alternative materials and production processes. “This is transformative and revolutionary,” Sant says. “We’re learning how to use waste as a resource, but we’re a long way from commercialization.”

Work such as Sant’s is exactly the kind of effort cap-and-trade officials hope to support, but Lytton says the shortcomings in global carbon markets have led to complacency about decarbonization. Sandbag wants the practice of handing out free credits to end, saying that fewer credits will force the price of carbon to rise and drive innovation.

CemBureau says cement-makers need help financing the risk part of breakthrough technologies, “whereby the private sector takes a responsibility, along with the public sector, to turn innovation projects into reality.”