The Price of Pollution? A Distance Function Approach to Valuing Multiple Pollutants in China

To achieve green development, the Chinese government has taken a number of steps to reduce pollution. Several provinces of China thereby are implementing pilot pollution emission trading schemes. However, problems remain before establishing a nationwide pollution emission trading system, i.e., at what price do polluters acquire another emission allowance in the stage of initial quota allocation. In this context, shadow prices of emissions could provide the policymakers important information for the allowance prices. Besides, environmental protection policies often result in the reduction of several pollutants simultaneously. Thus, considering the provincial and sectoral significant differences in China, this paper employs a nonparametric output distance function approach including multiple undesirable outputs to estimate shadow prices of $${\rm{S}}{{\rm{O}}_{\rm{2}}}$$SO2 and $${\rm{N}}{{\rm{O}}_{\rm{x}}}$$NOx at national level, provincial level and sectoral level. Our results suggest that multiple pollutants should be taken into account and shadow prices should be set differently at national, provincial and sectoral levels.