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2016-04-20 | EfD Discussion Paper

Can an Emission Trading Scheme Promote the Withdrawal of Outdated Capacity in Energy-Intensive Sectors? A Case Study of China’s Iron and Steel Industry

Zhu, Lei, Yuan Li, Xu Wang and Jianxin Guo. 2016. “Can an Emission Trading Scheme Promote the Withdrawal of Outdated Capacity in Energy-Intensive Sectors? A Case Study of China’s Iron and Steel Industry.” EfD Discussion Paper Series 16-09.
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Outdated capacity and substantial potential for energy conservation are the two main features of energy-intensive sectors in developing countries. Such countries also seek to implement market-based options to further control domestic carbon emissions as well as to promote the withdrawal of outdated capacity and upgrade production levels. This paper presents a quantitative assessment of an emission trading scheme (ETS) for China’s iron and steel industry. The diverse array of normal and outdated capacities are modeled in a two-country, three-good partial equilibrium model. The energy-saving benefits that result from emission abatement were captured through a technology-based marginal abatement cost (MAC) curve. Simulation results show that the abatement potential can be underestimated if the energy-saving benefits that result from emission abatement are not considered. In the scenario analysis, we demonstrate that the free allocation of allowances can cause a competitiveness distortion among normal and outdated domestic capacities, and such a distortion cannot be corrected by implementing supplementary measures such as border carbon adjustments. Given the government’s intention to promote outdated capacity withdrawal and production-level upgrading, an output-based allocation approach is strongly suggested for China’s iron and steel sector.