China's carbon allowance allocation strategy under the EU carbon border adjustment mechanism: An integrated non-parametric cost frontier approach

Abstract

The implementation of the European Union (EU) Carbon Border Adjustment Mechanism (CBAM) will affect the cost efficiency of Chinese exporters, and few studies have considered how to deal with its impact from the carbon market perspective. Based on this, this paper constructs two price-variable resource allocation (VPRA) models to investigate China's allowance allocation strategies to mitigate the impact of the EU CBAM from a carbon market perspective. This paper takes the steel and cement industries in each province of China for example for cost efficiency assessment and carbon allowance allocation, and finds that: (1) The EU CBAM has a negative impact, and it is necessary to incorporate the CBAM into the top-level system design of allowance allocation to obtain an allowance allocation scheme that maintains the cost efficiency level of each industry. (2) A higher and more stable carbon price in China can effectively counteract the impact of the EU CBAM and ensure that the cost efficiency of each industry does not fluctuate significantly. (3) When the Chinese carbon price exceeds 60 RMB/ton, the impact of the EU CBAM on the cost efficiency of each industry will become significantly smaller. (4) Measures to reduce the number of products exported to the EU are not effective in mitigating the impact of the EU CBAM when the number of products exported to the EU exceeds a certain rate. The findings of this paper provide useful policy insights for China and other developing countries to actively address the challenges of the EU CBAM.

Keywords: Allowance allocation scheme; CBAM; Carbon market; Carbon price; Cost efficiency.