Introducing a floor price in China's national carbon market

The national carbon market serves as an essential policy tool for China to achieve the "dual carbon" goals. However, the current market is characterised by quota over-allocation and market prices disconnected from abatement costs. To inspire emissions reduction and low-carbon investment, this study suggests setting carbon floor prices complementary to the benchmark approach in China's national carbon market. Based on 30 Chinese provinces data, the equivalent marginal abatement costs are estimated by a quantile parametric directional output distance function method, and the suggested carbon floor price for each of the years 2021-2024 is CN¥59.68/tCO₂, CN¥61.17/tCO₂, CN¥62.95/tCO₂, and CN¥64.21/tCO₂, respectively. The need for and feasibility of a floor price instrument are verified by comparing market prices and carbon costs embodied in green electricity prices. Furthermore, concerned about its potential cost-push effects, we simulate the short-term effects of a floor price using a non-competitive input-output price model. The results show that a floor price would not only lead to a cost-push effect in the covered power sector but also would have a more indirect influence on non-covered sectors with higher emissions, while the overall impacts of the floor price on consumers and producers are moderate (less than 0.185 % and 0.358 %, respectively). Our findings offer new insights into enhancing the mitigation incentives and price discovery function of China's national carbon market.