Estimation of greenhouse gases shadow price in the English and Welsh water industry

Abstract

Moving to a more sustainable and low-carbon footprint urban water cycle is essential in the light of climate change. In this paper, we estimate the implicit cost of reducing greenhouse gas (GHG) emissions for several English and Welsh water companies from 2013 to 2019. Using econometric techniques, we compute the shadow prices of direct and indirect CO2 emissions associated with the provision of drinking water. This methodological approach also allows us to investigate the impact of a set of environmental variables on the costs of water companies and therefore on the costs of reducing GHG emissions. We then compute the returns to scale, technical change, and technical efficiency of the water companies. The empirical results show the following: (1) the average shadow price of CO2 across years was 0.114 £/kgCO2, which means that the English and Welsh water industry needs to spend an extra £0.114 in operating expenditure to prevent the emission of one kilogramme of CO2; (2) the cost of reducing GHG emissions is very variable among water companies and across years; (3) water taken from boreholes and average pumping head increases cost requirements and therefore the inefficiency of water companies; and (4) the water industry may lower its production costs and thus the costs of reducing GHG emissions by improving its daily operations and adopting new technologies. From a policy perspective, this study evidences that in the English and Welsh water industry, a market-based approach may be more suitable to reduce GHG emissions than a carbon tax policy.