Measuring technical inefficiency and CO2 shadow price of Korean fossil-fuel generation companies using deterministic and stochastic approaches

Abstract

This paper measures the technical inefficiency and the shadow price of Korean fossil-fuel generation companies (GENCOs) between 2001 and 2016 at the firm-level. To obtain robust empirical results, this study employs both commonly used deterministic and stochastic estimation methods. The empirical results are as follows: the inefficiency estimates are approximately 0.09 (deterministic) and 0.08 (stochastic); the estimates of CO2 shadow price, in KRW/tCO2, are 82,758 (deterministic) and 49,830 (stochastic), which shows high volatility in the annual average shadow price. In addition, we find that the results of the deterministic method without any random errors show a large variation in the trends of technical inefficiency and shadow price, while the stochastic method with random errors yields only moderate volatility. Our empirical results are expected to assist policymakers in determining how much potential mitigation can be achieved through improved efficiency, and the range of the CO2 shadow price will contribute to more efficient policy tools.