Shadow Prices Research Articles

Diversification of urban water supply: An assessment of social costs and water production costs

Abstract The incorporation of new water sources into a supply system requires an assessment of their economic feasibility, which, in turn, demands knowledge of their associated costs. This study calculates water production cost and evaluates social cost by applying the residual value method and calculating the shadow price for several water sources. The results indicate that desalination and industrial reuse incur similar costs, with the former being more competitive in terms of investment (US dollar (USD) 0.28/m3) and the latter in operation and maintenance (USD 0.57/m3). Cisterns and greywater reuse incur higher investment costs (USD 2.20/m3 and USD 2.60/m3, respectively), while well water has the lowest total cost (USD 0.08/m3). Desalination showed the lowest degree of distortion between shadow price and water cost and between shadow price and the average tariff; meanwhile, there was moderate distortion for industrial reuse and groundwater sources. The conclusions suggest that desalination and industrial reuse offer good flow at feasible costs and are, therefore, strategically sound sources. However, for these sources and for wells, tariff policy does not reflect a significant part of the social cost they incur.

Irrigation water demand management with emphasis on pricing policy

Abstract Serious constraints in increasing water supply have led countries around the world to seek solutions for managing water demand. Proper pricing of water is one of the foremost water demand management policies which can lead to the optimal water use. On the flip side, the quality of agricultural water is declining due to the uncontrolled abstraction of groundwater. In this regard, the present study aims to determine the economic value of different qualities of water throughout pistachio-growing regions of the Rafsanjan-Anar plain in Iran. Results reveal that the economic value and price elasticity of water demand differ among different groups. Freshwater, moderately saline water and highly saline water have the highest to lowest elasticity and shadow price, respectively. Additionally, comparison of the gross margin, which represents the profit from each activity, in two conditions including the unsustainable status quo and sustainable conditions intended by the Ministry of Energy, shows that although water use has declined by 50%, the gross margin has decreased by only 36%. This implies it is feasible to reduce water use in pistachio orchards by water re-allocation with a minimum decline in profit, which will both reduce water use and ensure high economic benefits for farmers.

Assessing the contribution of farmers’ working conditions to productive efficiency in the presence of uncertainty, a nonparametric approach

This article investigates the contribution of farmers’ working conditions to production efficiency under state-contingent production uncertainty. Directional distance function is used to estimate efficiency scores and input shadow prices for 180 Spanish crop farms in 2015. Results suggest that shadow prices vary considerably between the different states of nature, suggesting why incorporating the stochastic production specification is important. The present study provides evidence of the important contribution of working conditions to technical efficiency. Thus, improved working conditions have the potential to help farms to progress toward sustainable agriculture.

Climate change in times of economic uncertainty: A perverse tragedy of the commons?

We explore the effect of raising economic uncertainty on local and global carbon emissions. Most economic models under uncertainty focus on the effect of risk on the supply of a control variable (e.g., emissions). Here we explore the effect of risk on both the supply and demand of local and global carbon emissions and, therefore, on their equilibrium shadow price. We show that in addition to the consumers’ level of risk aversion and prudence coefficient, an additional parameter not included in standard models, the elasticity of substitution between pollution and conventional inputs, plays a key role as a determinant of local and global emissions. An important implication of the analysis is that, under various specifications widely used for preferences and production technologies, a damning vicious cycle between increasing economic uncertainty and global pollution emissions is likely to occur.

JUE Insight: Measuring the Stringency of Land Use Regulation Using a Shadow Price Approach

I propose a shadow price approach to measuring the stringency of land use regulation. A regulation is considered more restrictive if the land developer is willing to pay a larger amount for a marginal relaxation of the regulation. I show that existing theory-based measures of land use stringency are either equivalents or variations of this shadow price measure. Using data from China, I demonstrate that it is possible to compare the stringency of two kinds of land use regulation, a key advantage of this shadow price approach.

The decline of home‐cooked food

AbstractThe share of home‐cooked food in the diet of UK households declined from the 1980s. This was contemporaneous with a decline in the market price of ingredients for home cooking relative to ready‐to‐eat foods. We consider a simple model of food consumption and time use that captures the key driving forces behind these apparently conflicting trends. We show that observed behaviour can be rationalised by the fact that the shadow price of home‐cooked food, which accounts for the fact that cooking takes time, has risen relative to the price of ready‐to‐eat food, due to the increase in the market value of time of secondary earners. We discuss the implications for policies that aim to encourage healthier diets.

Global sustainability of carbon shadow pricing: The distance between observed and optimal abatement costs

As an important environmental assessment indicator, carbon abatement costs may vary across countries in terms of their development stages. This abatement cost can be measured by a shadow pricing approach using parametric or nonparametric methods. The carbon shadow price (CSP) might be usually understood as the opportunity cost of how much we should give up gross domestic products (GDP) to reduce one unit of carbon emissions. Most research focuses on evaluating the observed value of the carbon shadow price at an individual level, while the optimal value at an aggregate level is often ignored. The novelty of this paper is to propose a nonparametric approach for estimating the optimal carbon shadow price by maximizing the possibility of GDP expansion and carbon reduction simultaneously. We investigate the distance between observed and optimal carbon shadow prices among 152 countries all over the world during the sample period 1991–2019. The result shows that an improving carbon shadow price is observed globally. However, a significant disparity in the distance between observed and optimal carbon shadow prices is detected among countries. Furthermore, we examine the impacts of prevalent climate protocols on global environmental performance. Finally, policy implications for improving sustainable development and achieving optimal carbon shadow prices are provided.

Real-time pricing for smart grid considering energy complementarity of a microgrid interacting with the large grid

Currently, generating electricity relies primarily on fossil energy, which is not only limited in resources but also harmful to the environment as it emits carbon dioxide and other gases. For contributing to carbon peaking and carbon neutrality, building a resource-saving and environment-friendly society, clean energy should be used for generating electricity as much as possible. Additionally, the overproduction of electricity by suppliers and the instability of power grids, which are caused by the information asymmetry between customers and power suppliers, can be solved by the smart grid based on smart meters. Motivated by the two aspects, a smart power system combining a microgrid system based on clean energy generation with a supplier based on fossil energy generation is considered. For pursuing maximal social welfare under joint power supply, a real-time pricing model is established. This model, which is convex, does not explicitly contain the electricity price variable such that the optimal Lagrange multiplier of its Karush–Kuhn–Tucker condition, i.e., shadow price, is taken as the optimal electricity price. For solving the Karush–Kuhn–Tucker system, the smooth Levenberg–Marquardt algorithm is used to solve its approximate smooth system of equations. The simulation results demonstrate that the proposed pricing model, joint supply mechanism and the smooth Levenberg–Marquardt algorithm are reasonable, feasible and effective.

Comparative analysis of the marginal abatement cost modeling for coal-fired power plants in China

Emissions trading system (ETS) is an effective approach to achieve China's “double carbon” targets. An accurate measurement of carbon MAC (marginal abatement cost) serves as the basic evidence for the stability of ETS and market validity. This paper constructs a comprehensive analytical framework, including four parametric and two non-parametric methods, to analyze the efficiency and carbon MAC of 92 large coal-fired power plants in China. Results show that the average technical efficiency and shadow price were 0.92 and 13.63 RMB/ton, respectively. As verified by Monte Carlo simulations, each method has its cons and pros, while the MAC calculated by the parametric stochastic frontier analysis (SFA) is the closest to the real carbon market price. Additional analyses show that the MAC is positively related with plant scale and negatively related to the provincial carbon intensity targets. This result suggests power plants' technological progress and the asymmetric government subsidies.

Eco-efficiency and shadow price of greenhouse gas emissions in Lithuanian dairy farms: An application of the slacks-based measure

This paper estimates the eco-efficiency, shadow price and marginal abatement costs of dairy farms in Lithuania based on Farm Accounting Data Network (FADN) data from 2015, 2017, and 2019. The Slacks-Based Measure-Data Envelopment Analysis (SBM-DEA) model is applied for approximating the environmental production technology. Herd size, labour, feed costs, agricultural land, capital are considered as inputs, whereas milk production and greenhouse gas (GHG) emission are used as desirable output and undesirable output respectively. To reflect the heterogeneity of farms in terms of GHG emissions, farm-specific emission parameters are calculated. The results show that the mean eco-efficiency remained relatively stable, ranging from 0.55 to 0.59, and that the GHGs emission reduction potential ranged between 20% and 25% over the period considered. The shadow price was not stable and increased from 41.54 EUR/t CO2-eq in 2015 to more than 55.89 EUR/t CO2-eq in 2019. The potential GHGs emission reductions of 1% in 2015, 2017 and 2019 resulted in marginal abatement costs of EUR 41.58, EUR 54.74, and EUR 31.68 respectively. Results across farm size classes imply that farms with the highest GHG emission have the lowest marginal abatement costs, which means that policy actions should target the most polluting farms. The findings have also revealed that farms are more inefficient in terms of land use, capital, and feed as opposed to GHG emission. Our results suggest that the large dairy farms require more attention in regards to their environmental productivity improvements, whereas small farms are underperforming in feed use and capital utilisation. Thus, policy interventions are needed for improvement of farm productivity, yet they should also address the environmental dimension of sustainability as well.

An integrated techno-economic analysis on wastewater reclamation in Hong Kong: A comprehensive cost – Benefit analysis with life cycle assessment

Wastewater reclamation and reuse projects have been gaining significant attention as ways to secure sustainable water resources while preventing environmental degradation. However, traditional cost-benefit analyses do not reflect the true net benefits of these processes as they do not consider all externalities, particularly due to the difficulties in monetizing environmental impacts, thereby leading to underutilization. In this study, we conducted a hybrid cost-benefit analysis with an integrated environmental externality approach to evaluate the true net benefit of wastewater treatment and reclamation with explicit and implicit costs and estimated benefits. Firstly, we developed a cost-benefit analysis model based on the Drainage Service Department's statistical data from the Shek Wu Hui plant in Hong Kong from 2014 to 2018. Next, we estimated the external environmental benefits from pollutant abatement based on the shadow price of each pollutant by adopting a distance frontier function. We then conducted a life-cycle assessment to investigate the potential environmental impacts of the process using SimaPro 8.5.2.0 software and the EcoInvent 3 database, utilizing Stepwise2006 methodology for full monetization. A sensitivity analysis was applied to control for uncertainties as a robustness check. Our results show that aggregate cost, shadow price, and monetized environmental impact are estimated to be 4.47, 4.75, and 1.23 HKD per m3 of treated water respectively. Based on these results, our study illustrates that the true benefit is noticeably higher than the unit cost of wastewater reclamation, dependent upon a scale, and represents a breakeven point of 63,769 m3 of water reclamation per day. Our study further demonstrates that wastewater reclamation is viable from both social and economic perspectives and will increase the government budget by 81 million HKD. Therefore, this study can provide a basic guideline for developing a more complete economic valuation of wastewater treatment and reclamation projects.

Novel double auctions for spatially distributed parking slot assignment with externalities

This article considers a parking slot assignment problem in a sharing economy where parking slots are spatially heterogeneous. When buyers (i.e., the slot users) park and take their cars in the reserved parking slots, environment externalities are created. We incorporate the externality costs in our winner determination model and construct a padding-based Vickrey-Clarke-Groves (PV) double auction where each buyer submits an XOR bid on his/her desired parking slots at the same price. In the PV double auction, the padding intuition is adopted on either the supply or demand side. We then propose a padding-based shadow price (PS) double auction by integrating the padding method with the shadow price method. Due to the rises in buying prices and declines in selling prices, the PS double auction is likely to realize higher auctioneer’s payoff. Both PV and PS double auctions achieve incentive compatibility, individual rationality, budget balance and asymptotical efficiency. Our numerical experiments demonstrate that the proposed double auctions can realize high efficiency.

Environmental total factor productivity of agriculture in South Asia: A generalized decomposition of Luenberger-Hicks-Moorsteen productivity indicator

The agricultural total factor productivity (TFP) assessment is essential for providing intuition regarding factors involving productivity change. Integration of environmental aspects together with productive efficiency provides identification of factors for agricultural growth and environmental performance which anticipates foundation for the sustainable agricultural development. In a non-parametric framework, this paper establishes a modified directional by-production model to ensure the link between production and pollution-generating sub-technologies which offers more refined economic interpretations thereby proposing a unique shadow value of the pollution-generating inputs for the two sub-technologies. Further, a non-oriented generalized Luenberger-Hicks-Moorsteen (LHM) productivity indicator is adapted for the refined by-production model to measure the environmental TFP of agriculture sector in South Asia during 2000–2019. The environmental LHM-TFP decomposition accumulates both input and output changes yielding three mutually exclusive components, i.e. technical efficiency change, technological progress, and scale efficiency change. Moreover, the spatial evolution of agricultural carbon shadow price has been accessed during the study period. The policy implications suggest effective ways to improve the environmental TFP of agriculture in South Asia by strengthening technical efficiency advancements and optimizing economies of scale, promoting the coordinated development among countries for sustainable agricultural practices, and encouraging cleaner agricultural production for emissions reduction.

Inventories and the term structure of oil prices: A complex relationship

According to conventional storage theory, the difference between spot and futures prices (known as the ‘basis’) can be explained by the total cost of storing a commodity for a specific period of time. The theory predicts a positive relationship between inventory levels and the basis, and a negative correlation between inventories and marginal convenience yield. We investigate whether there is a defined and quantifiable relationship between inventory levels and market structure – defined as the basis or the corresponding degree of contango/backwardation – and what the exact nature of that relationship might be. The major drivers of inventories – the cost of carry, convenience yield and spread options value – are estimated for eight major international storage hubs using daily data from December 21, 2015, to January 25, 2019.The analysis indicates that basic predictions of inventory theory are valid for daily and weekly frequencies but become less reliable for lower frequency data. We propose an alternative: a spread option-based formulation that adds a locational dimension to the theory and is based on the prices of crude oil at different locations, factoring in costs of storage and transportation, and the time required to transport oil between them. This methodology offers a viable alternative to the traditional cost of carry approach; it can estimate implied convenience yields and the shadow price of inventories. The data and methodology proposed in this study can give policy makers a better understanding of implied convenience yields, shadow storage prices, and market direction. It can also facilitate the construction of timely and efficient policies in the domains of energy security, market stability, and the management of public crude oil inventories. A better understanding of the relationship between inventories and the term structure of oil prices can assist market participants in trading, hedging and inventory management.

Socioeconomic effects of a bottom-up multifunctional land consolidation project

Taking agricultural land out of production or shifting from crop production to permanent grassland have recently been proposed in Denmark as general measures for contributing to greenhouse gas (GHG) reductions. One of the particular features of such measures is the creation of co-benefits, as taking agricultural land out of intensive production may affect a range of ecosystem services and economic goods, such as reduced nutrient loads and emissions of GHGs, improved biodiversity, and improved recreational opportunities. In this paper, we present results from an ex ante socioeconomic Cost-Benefit Analysis (CBA) with the purpose of assessing whether the expected benefits of a bottom-up local development plan for multifunctional land use in the catchment of Lake Glenstrup in Denmark will outweigh the expected costs. After quantifying the wide range of impacts, we apply benefit transfer to value them within the CBA framework. Among the primary effects are reduced emission of GHGs, reduced leaching of nutrients, increased recreational options, and opportunity costs from agriculture. The results indicate that the initiatives could lead to a net social gain of 1.4 mil. €. We perform a sensitivity analysis which shows that the choice of the spatial extent of the recreational effects has a large impact on the results, which range from 0.4 to 5.2 mil. €. Also, the shadow price of reduced GHG emissions play a major role. Finally, a distribution analysis shows that especially farmers bear the majority of costs, whereas other stakeholders enjoy most of the benefits.

Electricity storage and market power

Electricity storage is likely to be an important factor in balancing fluctuations in renewable generators' output, but concentrated ownership could lead to market power. We model this for short-term (daily) storage in the British electricity wholesale market, with generating companies acting as either price-takers or Cournot competitors. We discuss how competitive storage charging and discharging behaviour depends on the balance between the market price and shadow price of stored electricity. Electricity storage raises welfare, consumer surplus and renewable generators’ revenues, while reducing revenues for conventional generators. Market power in storage slightly reduces the welfare gains; Cournot behaviour by generators reduces welfare but has relatively little impact on the incremental effect of storage. Market power in electricity storage is undesirable, but market power in generation is much worse. The interactions between market power in generation and in storage are complex, suggesting that predictions from one market may not apply elsewhere and context-specific modelling will be valuable.

Comparison of potential CO2 reduction and marginal abatement costs across in the China and Korea manufacturing industries

Here, we use an input distance function approach to determine the shadow price of carbon dioxide (CO2), technical efficiency and potential for emission reductions of the industrial sectors of China and Korea, and impact of carbon trading on costs. Data from 20 industries in the manufacturing sectors of South Korea and China were analyzed during 2015–2019. The potential for CO2 emission reductions and cost-saving effects of emissions trading were compared between the two countries. The average technical efficiency score of 20 manufacturing industries in Korea was 0.71, indicating that production costs could be reduced by almost 30%, while for China, the potential cost savings were 4% higher. The average marginal abatement cost in Korea was estimated as US$6.46/ton, while the weighted average marginal abatement cost for CO2 emissions (p^us), was US$15.1/ton. For China, the respective values were similar, at US$3.21/ton and US$6.57/ton.

Effects of a grazing permit market on pastoralist behavior and overgrazing in Kenya

The success of market-based mechanisms in reducing conflicts and internalizing externalities depends on their ability to clarify property rights amongst heterogenous resource users. We investigate the effectiveness of novel markets in achieving their goals using the case study of grazing markets in Laikipia County, Kenya. In this system, sheep- and goat (shoat)- and cattle-rearing pastoralists negotiate land access for cattle with neighboring cattle ranchers. Using data on pastoralists’ livestock and contracting preferences and a model of pastoral herd management, we show that contracting for cattle grazing access on private property alters relative input shadow prices for grazing resources in communal pastoral lands, ultimately resulting in relieved cattle grazing pressure. However, the permitting process is less attractive to pastoralists who prefer rearing shoats instead of cattle. These shoat-rearing pastoralists instead fill some of the vacated space with shoats instead of purchasing permits themselves. This leakage offsets some of the conservation benefits arising from the contracting program and results in a greater share of shoats in the communal herd mix. Approximately 0.59 cows’ worth of free space persists on the commons per permit sold, indicating reduced grazing pressure, but this represents a small proportion (3.8%) of the total livestock in the system. The narrow introduction of the cattle-focused permit market and lack of strong management institutions on the commons dampen the permitting program’s conservation benefits, necessitating further interventions. Alleviating these factors and dramatically scaling up the program has the potential to turn the permitting system into a successful conservation tool.

Economic Impact of Climate Change on the Implementation of Best Management Practices in the Fort Cobb Watershed

AbstractThis study determines the most cost‐effective selection and location of Best Management Practice (BMP) scenarios for farmlands to reduce soil erosion and the delivery of sediment and phosphorus to the Fort Cobb Reservoir watershed under current and future climate scenarios. Using the Soil and Water Assessment Tool, detailed conservation practices (conservation tillage, contour farming, no‐tillage, and terracing) are simulated to determine crop yields, sediment, nitrogen, and phosphorus loss of three crops (winter wheat, irrigated cotton, and pasture) by each land use unit (hydrologic response units) and location in the watershed. An economic model is used to determine the cost‐minimizing choice of BMP scenarios for each land‐use unit that meets 50%, 75%, and 90% reduction of sediment, nitrogen, and phosphorus loads and the impact of climate change on the net return to farmers. Results indicate that the effective spatial placement of BMP scenarios is not the same under different climatic conditions. The average optimal net return to farmers ranges from 170.39 to 316.32 $/acre for all the scenarios. The shadow prices vary from 2.36 to 17.78 $/ton/acre of sediment abated. Although individual BMP scenario is effective in reducing sediment loads, combined BMP scenarios achieve higher performance. This work will help guide policymakers and farmers in decision‐making for the future regarding water quantity used and water quality downstream in the recreation area of the Fort Cobb Reservoir.

The shadow prices of CO2, SO2 and NOx for U.S. coal power industry 2010–2017: a convex quantile regression method

The shadow prices of CO2, SO2 and NOx for U.S. coal power industry 2010–2017: a convex quantile regression method