Carbon allowance allocation strategy in China’s steel industry under the EU carbon border adjustment mechanism

Abstract

The upcoming EU carbon border adjustment mechanism (CBAM) may affect the cost efficiency of the Chinese steel industry. However, few studies have looked into the ways to cope with the negative impact of the CBAM taking into consideration the main features of the carbon market. This study constructed two variable price resource allocation models and examined the allowance allocation strategies to mitigate the negative influences of the EU CBAM in the short and long term from the perspective of the carbon market. Both models were applied to the steel industry’s allowance allocation in provinces of China’s mainland. The results show that: (1) When China’s carbon price is constant in the short run and rises in the long run, the EU CBAM will reduce the cost efficiency of the steel industry. (2) The higher the quantity of steel products exported from China to the EU, the greater the decrease in cost efficiency of the Chinese steel industry, and the higher the level of carbon price in China the more stable the cost efficiency of the steel industry. (3) Optimizing allowance allocation through the carbon market can effectively alleviate the negative impact of the EU CBAM. (4) By adjusting the energy consumption while optimizing the carbon allowance allocation, it is possible to develop a scheme with less influence on the total allowance. The conclusions of this study provide some policy implications for China to improve its carbon market policy while effectively responding to the challenges of the EU CBAM.