How does the carbon market influence the marginal abatement cost? Evidence from China's coal-fired power plants

This paper investigates the cost implications of the carbon emission trading scheme (CETS), a crucial tool for cost-effective carbon reduction, by analyzing its impact on the marginal abatement cost (MAC) of CO2 emissions from coal-fired power plants in China. Utilizing the pilot CETS as a quasi-natural experiment, we employ a considerate shadow price framework for MAC measurement and a staggered difference-in-differences strategy to identify the causal effect of the pilot CETS and its underlying mechanisms. The findings reveal that the pilot CETS significantly increased the MAC by an average of 120 yuan/ton, highlighting the regulatory impact of carbon pilots. The primary mechanism is identified as a cost-increasing effect, where power plants curtail CO2 emissions by decreasing energy usage and electricity production. The rise in abatement cost per unit of carbon is primarily attributed to the decrease in output caused by the reduction of energy inputs, signifying that the majority of the MAC rise stems from the escalating costs associated with energy inputs. The policy effect is more pronounced for local and low-energy-efficiency power plants, as well as those situated in regions with stringent environmental regulations and low marketization levels. Additionally, higher MAC increases are observed in carbon market pilots with the benchmarking rule, higher carbon prices, and higher trading volumes. To enhance the carbon market's effectiveness in the power sector, we recommend progressively reducing administrative controls on the power sector, policy coordination to avoid conflicts with other environmental regulations, and providing financial and policy support to improve low-carbon technologies in coal-fired power plants.