The shadow price of CO₂ emissions in China's iron and steel industry

As China becomes the world's largest energy consumer and CO₂ emitter, there has been a rapidly emerging literature on estimating China's abatement cost for CO₂ using a distance function approach. However, the existing studies have mostly focused on the cost estimates at macro levels (provinces or industries) with few examining firm-level abatement costs. No work has attempted to estimate the abatement cost of CO₂ emissions in the iron and steel industry. Although some have argued that the directional distance function (DDF) is more appropriate in the presence of bad output under regulation, the choice of directions is largely arbitrary. This study provides the most up-to-date estimate of the shadow price of CO₂ using a unique dataset of China's major iron and steel enterprises in 2014. The paper uses output quadratic DDF and investigates the impact of using different directional vectors representing different carbon mitigation strategies. The results show that the mean CO₂ shadow price of China's iron and steel enterprises is very sensitive to the choice of direction vectors. The average shadow prices of CO₂ are 407, 1226 and 6058 Yuan/tonne respectively for the three different direction vectors. We also find substantial heterogeneity in the shadow prices of CO₂ emissions among China's major iron and steel enterprises. Larger, listed enterprises are found to be associated lower CO₂ shadow prices than smaller, unlisted enterprises.