Estimating Regional Shadow Prices of CO2 in China: A Directional Environmental Production Frontier Approach

Shadow price of carbon dioxide (CO2) plays a fundamental role in evaluating CO2 abatement cost and formulating regional environmental policies. In this study, CO2 shadow prices are estimated in 29 provinces of China from 2006 to 2015. Directional Environmental Production Frontier Function (DEPFF) measures the distance between actual production points and the effective production frontier surface, which yields the shadow prices of CO2 emission. With the relationship between CO2 emission and Gross Domestic Product (GDP) growth which is encapsulated in the shadow price, the provinces are classified into three groups: acceleration zone, buffer zone, and deceleration zone. The acceleration zone is characterized by a smaller emission growth driving a greater economic growth, and the provincial average price of CO2 is 184.16 US$/ton. In the buffer zone, a significant emission increase brings about less economic growth with the average shadow price at 86.57 US$/ton. In the deceleration zone, a high growth rate of CO2 emissions is accompanied with an economic output decrease, which implies that the shadow price of CO2 should be negative, and the mean value is -200.7 US$/ton. As the CO2 abatement potential differs significantly across provinces, the environmental policy and CO2 reduction targets should be region-specific.