Abstract
China, the world`s largest producer, is likely to be obligated to reduce greenhouse gas emissions under the post-Kyoto protocol. This paper estimates a Shephard input distance function for the Chinese fossil-fueled power generation sector to measure the shadow price of emissions, technical efficiency, and indirect Morishima elasticities of substitution between inputs. Empirical results show that, on average, it costs approximately 3.2 US dollars per year to reduce emissions by one ton over the period 1981-2009. This finding indicates that Chinese power sector is expected to benefit from selling emission permits to other countries such as Korea and Japan, given that our estimate for China is lower than the ones previous literatures estimated for the power sector in these countries. The maximum attainable average reduction potential amounts to approximately 25 million tons per year by improving technical efficiency. Capital is substitutable with both coal and oil and capital is relatively more readily substituted for these fuels.
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