ANALYSIS OF THE CARBON ALLOWANCE ALLOCATION AND SECTORAL COVERAGE IN THE CARBON MARKET UNDER THE NEW CLIMATE AMBITION: A CASE STUDY IN CHINA

Abstract

Reasonable allocation of carbon allowances and determination of coverage in the carbon market are essential to the realization of the emissions reduction goal. Using China as an example, we propose a multi-criteria allocation scheme based on the principle of equity, efficiency and feasibility, considering carbon abatement costs and carbon leakage risks. An improved zero-sum gains-data envelopment analysis model in accordance with China’s new carbon intensity target in climate ambition is used for allowance allocation. Subsequently, the sectoral coverage choice of the carbon market is proposed. We obtain an optimal reallocation scheme after five iterations. The results show that the allocation method in this study can better promote the carbon market to reduce emissions at a lower cost while preventing carbon leakage to a certain extent. Based on the contribution to the overall emission reduction, the emission reduction costs and carbon leakage risks, we further classify the sectors into three categories. With China as an example, these findings lay a scientific basis for China to achieve its climate ambition through the carbon market, and also have global implications in regard to developing a more scientific allocation scheme, especially for carbon markets in emerging and developing countries.