Abating carbon emissions at negative costs: Optimal energy reallocation in China's industry

Industry in China is an essential pillar of the economy and a major source of energy consumption and carbon emissions. Energy misallocation across industrial sectors exacerbates energy consumption and carbon emissions. This study uses stochastic frontier analysis (SFA) to estimate the contribution and efficiency of capital, labor, and energy inputs to China's production between 2010 and 2020. Under the assumption of optimal allocation in a perfectly competitive market, we estimated the optimal energy input using the SFA results. The counterfactual results demonstrated considerable potential for energy savings, carbon abatement, and production increase under synergistic governance. According to the estimation, China's industry could save 4-24% of its energy input. The energy allocation adjustment varies across industry subsectors. Specifically, heavy industries have tremendous energy-saving potential, whereas the power production and supply subsectors require more energy. The overall energy conservation would have a synergistic effect of 0.3 to 1.4 billion tons of carbon reduction along with an extra 3.26 and 6.52 trillion Yuan output value. Such reallocation would also have the co-benefit of transforming the industry's energy mix, specifically, reducing its dependence on coal while increasing the share of electricity, which are both very critical in the process of carbon neutrality. The government could apply this method to guide the synergistic governance of industrial energy savings, carbon reduction, and production.