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Can an emission trading scheme promote the withdrawal of outdated capacity in energy-intensive sectors? A case study on China's iron and steel industry

Lei Zhu, Xiao-Bing Zhang (), Yuan Li, Xu Wang and Jianxin Guo

Energy Economics, 2017, vol. 63, issue C, 332-347

Abstract: Outdated capacity and substantial potential for energy conservation are the two main features of energy-intensive sectors in developing countries.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to implement market-based options to further control domestic carbon emissions as well as to promote the withdrawal of outdated capacity and upgrade production level. This paper presents a quantitative assessment of the emission trading scheme (ETS) for China's iron and steel industry. The diverse array of normal and outdated capacities was modeled in a two-country, three-good partial equilibrium model. Simulation results show that the abatement potential can be underestimated if the energy-saving effects that result from emission abatement are not considered. In the scenario analysis, we demonstrated that the free allocation of allowances can cause a competitiveness distortion among domestic normal and outdated capacities. Given the government's intention to promote outdated capacity withdrawal and production-level upgrading, an output-based allocation approach is strongly suggested for China's iron and steel sector.

Keywords: Emission trading scheme; Iron and steel sector; Energy saving; Competitiveness; Output-based allocation (search for similar items in EconPapers)
JEL-codes: C63 Q48 Q52 Q59 (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1016/j.eneco.2017.02.004

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