Exploring shadow prices of carbon emissions at provincial levels in China

Abstract

Since carbon emissions are considered to contribute the lion's share in global warming, extensive studies have been devoted to measuring the carbon emissions abatement cost in various ways. This paper derives the shadow prices of China's aggregate carbon emissions at provincial levels by using directional output distance function and Shephard output distance function. The empirical results indicate that the shadow prices estimated by the directional distance function with directional vector of (1,−1) are significantly higher than those estimated by Shephard distance function, which implies that the green production technology is very expensive for the developing country of China. In addition, the shadow prices of carbon emissions present a rising trend during the sample period, which implies that it is increasingly costly for China to regulate CO2 emissions. Moreover, the shadow price is positively correlated with regional economic development levels. Generally, the shadow price of the high income regions is significantly bigger than that of low income regions. Therefore, China should promote regional scheme of carbon emissions reduction, such as regional carbon emissions trading scheme, to fulfill its ambitious target of carbon emissions reductions.