China's manufacturing firms' willingness to pay for carbon abatement: A cost perspective

The existing studies of emissions reduction focus mainly on the technical potential and abatement costs while overlooking firms' willingness to pay (WTP) for emissions reduction. Yet WTP is a key parameter in a firm's decision to carry out emissions reduction while maximizing its profits. This paper estimates China's manufacturing industry (CMI) firms' maximum WTP for carbon abatement-defined as the cumulative product between the marginal abatement cost and corresponding abatement potential-using a large sample from a data envelopment analysis model. The results show that (a) the maximum WTP is significantly constrained by an isocost carbon abatement curve at RMB 8.65 million for the representative CMI firm; (b) the representative firms' WTP for carbon abatement varies among the sub-sectors; and (c) profitability and production scales both positively affect firms' WTP for carbon abatement in all of CMI sub-sectors, while innovation investment has a negative effect. The results suggest that the cost of carbon reduction technology for CMI firms should be below RMB 8.65 million for a representative CMI firm. The government should formulate subsidies or tax relief policies to help firms reduce their abatement costs. Further, the division of tasks in different sub-sectors, between carbon emissions reduction on the one hand, and ongoing innovation on the other, should be clearly distinguished by policy bias to promote the transformation of industrial structure.

Automated summary

Existing studies on emissions reduction mainly focus on technical potential and abatement costs, neglecting firms' willingness to pay (WTP) for emissions reduction. This paper estimates the maximum WTP for carbon abatement in China's manufacturing industry (CMI) firms using a large sample from a data envelopment analysis model. The results show that the maximum WTP is significantly constrained by the isocost carbon abatement curve at RMB 8.65 million for the representative CMI firm, and WTP varies among sub-sectors. Profitability and production scales positively affect firms' WTP, while innovation investment has a negative effect.