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Nash marginal abatement cost estimation of air pollutant emissions using the stochastic semi-nonparametric frontier

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  • Lee, Chia-Yen
  • Wang, Ke

Abstract

Emissions trading (or cap and trade) is a market-based approach providing economic incentives for achieving reductions in the emissions of pollutants. Marginal abatement costs (MAC), also termed shadow prices of air pollution emissions, provide valuable guidelines to support environmental regulatory policies for CO2, SO2 and NOx, the key contributors to climate change, smog, and acid rain. This study estimates the marginal abatement cost of undesirable outputs with respect to the Nash equilibrium on the stochastic semi-nonparametric envelopment of data (StoNED) in an imperfectly competitive market. Considering an endogenous price function of electricity, the mixed complementarity problem (MiCP) is formulated to identify the Nash equilibrium in a production possibility set. The proposed model addresses the four issues of MAC estimation in the existing literature. Applying the proposed method to an empirical study of 33 coal-fired power plants operating in China in 2013 shows that StoNED provides a robust frontier that is not sensitive to the outlier and the proposed interval of MAC estimation validates the shadow prices corresponding to the Nash equilibrium in an imperfectly competitive market.

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  • Lee, Chia-Yen & Wang, Ke, 2019. "Nash marginal abatement cost estimation of air pollutant emissions using the stochastic semi-nonparametric frontier," European Journal of Operational Research, Elsevier, vol. 273(1), pages 390-400.
    • Handle: RePEc:eee:ejores:v:273:y:2019:i:1:p:390-400
    DOI: 10.1016/j.ejor.2018.08.016
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    3. Wu, Yinyin & Yu, Jie & Song, Malin & Chen, Jiandong & Hou, Wenxuan, 2021. "Shadow prices of industrial air pollutant emissions in China," Economic Modelling, Elsevier, vol. 94(C), pages 726-736.
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    5. Dai, Sheng & Zhou, Xun & Kuosmanen, Timo, 2020. "Forward-looking assessment of the GHG abatement cost: Application to China," Energy Economics, Elsevier, vol. 88(C).
    6. Quinn, Barry & Gallagher, Ronan & Kuosmanen, Timo, 2021. "Lurking in the Shadows: The Impact of Emissions Target Setting on Carbon Pricing and Environmental Efficiency," QBS Working Paper Series 2021/05, Queen's University Belfast, Queen's Business School.
    7. Kuosmanen, Timo & Zhou, Xun, 2021. "Shadow prices and marginal abatement costs: Convex quantile regression approach," European Journal of Operational Research, Elsevier, vol. 289(2), pages 666-675.
    8. Xing Yang & Jun-long Mi & Yue Zeng & Wen-bo Wei, 2023. "Bilinear Integrable soliton solutions and carbon emission rights pricing," International Journal of Low-Carbon Technologies, Oxford University Press, vol. 18, pages 131-143.
    9. Kuosmanen, Timo & Zhou, Xun & Dai, Sheng, 2020. "How much climate policy has cost for OECD countries?," World Development, Elsevier, vol. 125(C).
    10. Wu, F. & Wang, S.Y. & Zhou, P., 2023. "Marginal abatement cost of carbon dioxide emissions: The role of abatement options," European Journal of Operational Research, Elsevier, vol. 310(2), pages 891-901.
    11. Su, Kuangxi & Yao, Yinhong & Zheng, Chengli & Xie, Wenzhao, 2023. "A novel hybrid strategy for crude oil future hedging based on the combination of three minimum-CVaR models," International Review of Economics & Finance, Elsevier, vol. 83(C), pages 35-50.
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