Carbon Allowance Allocation Strategy For Typical Chinese Industries Under The EU Carbon Border Adjustment Mechanism

On July 14,2021,the EU proposed a carbon tariff on carbon emissions embedded in five energy-intensive sectors: electricity,steel,cement,aluminum,and fertilizers in its policy proposal on the CBAM,which will undoubtedly increase the cost of carbon for Chinese companies exporting to the EU.In 2026,the EU will officially launch CBAM,and producers exporting to the EU will need to pay a fee for the purchase of a “CBAM certificate”,the price of which reflects the EU carbon price.Since the adjustment of tariffs by importing countries will affect the costs of exporters through a pass-through mechanism,the implementation of the EU CBAM will result in industries included in China’s national carbon market facing both EU carbon tariffs and Chinese carbon prices.Therefore,it is very important to assess the impact of the EU CBAM and to develop a strategy for allowance allocation from the perspective of the carbon market to deal with the impact of the EU CBAM.China officially launched the national carbon market on July 16,2021,and will include eight major industries,including electricity,steel and,building materials,to achieve peak carbon by 2030 and carbon neutrality by 2060.The carbon market is a cost effective market-based emission reduction mechanism,and the allocation of allowances is one of the core elements of the carbon market.The inclusion of the CBAM in the design of the allowance allocation system is conducive to protecting the competitiveness of the Chinese industry.At the same time,the ability and potential to reduce emissions varies widely among Chinese provinces and regions,and even the cost efficiency of the same industry varies widely across provinces and regions,so regional differentiation strategies to address the EU CBAM need to be proposed based on these differences.Given that energy conservation and emission reduction have synergistic effects,studying how to rationally allocate carbon allowances and energy consumption targets for each province and establish a linkage mechanism for carbon allowances and energy is conducive to increasing China’s flexibility and synergy in responding to the EU CBAM.Most of the existing studies on the CBAM have focused on assessing its impacts on the economy,environment,trade,welfare,emissions,etc.There is relatively little literature on how to mitigate the negative impacts of the CBAM.In addition,most of the studies on allowance allocation in a nonparametric frontier framework are based on technical efficiency for optimization,and there is no literature on optimization of allowance allocation based on cost efficiency.Improving cost efficiency can help reduce production costs and strengthen the competitiveness of enterprises.Studying how to optimize quota allocation based on cost efficiency can provide policy insights for China to actively respond to the challenges of the EU CBAM.In this dissertation,two theoretical models of allowance allocation based on cost efficiency are constructed,the CBAM is incorporated into the design of allowance allocation in the national carbon market,and an empirical study is conducted on how to scientifically allocate carbon allowances to each province to keep the cost efficiency of the industry constant and thus maintain the international competitiveness of the industry.Specifically,the following questions are examined:Firstly,the initial cost efficiencies and the reasons for their changes in the steel and cement industries in the Chinese provinces in the scenario where the EU has not yet launched the CBAM are analyzed.Under the non-parametric cost frontier framework,a cost efficiency DEA model is used to estimate the initial cost efficiency of the Chinese steel and cement industries in 2026 under the scenario that the EU does not initiate the CBAM,and further decompose the cost efficiency into technical efficiency and allocative efficiency to analyze the causes of the initial cost efficiency changes.The results show that the vast majority of provinces will experience cost inefficiency,and the average cost efficiency of the cement industry is higher compared to that of the steel industry,but the cost efficiency gap in the cement industry is greater among provinces,and when the technical level of steel and cement enterprises in each province is not improved within a certain period,the level of allocative efficiency needs to be improved using a rational allocation of resources within the province,thus promoting cost efficiency further improvement.Secondly,the impact and characteristics of the EU CBAM on the cost efficiency of the steel and cement industries in China’s provinces are investigated.Under the non-parametric frontier framework,the cost efficiency DEA model is used to estimate and summarize the changes and characteristics of cost efficiency in China’s steel and cement industries after the formal launch of the EU CBAM in 2026,with the following main results: First,the EU CBAM will negatively affect the cost efficiency of China’s steel and cement industries,reducing the efficiency level of China’s steel and cement industries in using resources at minimum cost,and weakening the international competitiveness of these two industries from the measured results;Second,the higher the EU carbon price and the more products are imported from China,the greater the change in cost efficiency of the Chinese steel and cement industries;Third,the higher the level of the Chinese carbon price and the smaller the change in carbon price,the less the cost efficiency of the Chinese steel and cement industries will be affected by the EU CBAM;Fourth,when China’s exports to the EU exceed a certain rate,it is not ideal if measures are taken to reduce the volume of exports to mitigate the impact of the CBAM.Thirdly,the VPRA(a)model is constructed,which is used to incorporate the CBAM into the allowance allocation system design and allocate allowances to the Chinese steel and cement industries based on carbon price information,resulting in a carbon allowance allocation scheme that keeps cost efficiency constant.The main results are as follows: First,the higher the carbon price in China,the more stable the carbon price is,the more favorable it is for the Chinese steel and cement industries to maintain the stability of cost efficiency in the face of the EU CBAM;Second,when the EU carbon price is higher and the EU imports more steel or cement products from China,the more carbon allowances China needs to reduce to cope with the impact of the EU CBAM;Third,the VPRA(a)model is relatively easy to use,only needing to know the information before and after the carbon price change to obtain the allowance adjustment scheme,but the model does not apply to the scenario where the Chinese carbon price is too low and the Chinese carbon price rises too much,because then a substantial carbon allowance adjustment is needed to mitigate the negative impact of the EU CBAM,which will put a lot of pressure on Chinese enterprises to reduce emissions.Fourthly,the VPRA(b)model is constructed,which is used to incorporate the CBAM into the allowance allocation system design and adjust carbon allowances and energy consumption for China’s steel and cement industries based on input-output information,keeping the cost efficiency of each industry unchanged.The VPRA(b)model is an extension of the VPRA(a)model,and the scenarios obtained using the VPRA(b)model include those given by the VPRA(a)model giving wider applicability of the scheme.In addition,the VPRA(b)model overcomes the shortcomings of the VPRA(a)model by allowing the range of carbon allowance reduction to be freely set,thus avoiding excessive carbon allowance reduction.The results of the study show that energy consumption adjustment along with carbon allowance optimization can obtain a solution to mitigate the negative impact of the EU CBAM with less impact on the total carbon market allowance.Finally,based on the findings of the study,policy recommendations for China to cope with the impact of the EU CBAM are given in terms of allowance allocation optimization,energy consumption adjustment,carbon price,export quantity,climate negotiation,technological progress,and carbon accounting cost reduction.For example,it is recommended that the CBAM be incorporated into the top-level system design for allowance allocation,that priority is given to optimizing allowance allocation based on cost efficiency rather than technical efficiency,and that the construction of China’s national carbon market and active climate negotiations with the EU be accelerated.