Measuring the CO2 shadow price for wastewater treatment: A directional distance function approach

Abstract

The estimation of the value of carbon emissions has become a major research and policy topic since the establishment of the Kyoto Protocol. The shadow price of CO2 provides information about the marginal abatement cost of this pollutant. It is an essential element in guiding environmental policy issues, since the CO2 shadow price can be used when fixing carbon tax rates, in environmental cost-benefit analysis and in ascertaining an initial market price for a trading system. The water industry could play an important role in the reduction of greenhouse gas (GHG) emissions. This paper estimates the shadow price of CO2 for a sample of wastewater treatment plants (WWTPs), using a parametric quadratic directional distance function. Following this, in a sensitivity analysis, the paper evaluates the impact of different settings of directional vectors on the shadow prices. Applying the Mann–Whitney and Kruskal–Wallis non-parametric tests, factors affecting CO2 prices are investigated. The variation of CO2 shadow prices across the WWTPs evaluated argues in favour of a market-based approach to CO2 mitigation as opposed to command-and-control regulation. The paper argues that the estimation of the shadow price of CO2 for non-power enterprises can provide incentives for reducing GHG emissions.