Shadow prices of air pollutants in Czech industries: A convex nonparametric least squares approach

The Czech Republic, with a 28% of GDP represented by industry, belongs among the most industrialized countries in the EU (Eurostat, 20115). Although the air quality in the Czech Republic has significantly improved as a result of stricter air quality control during the transition period in 1990’s and the implementation of environmental acquis communitaire of the European Union in the following decade (Moldan & Hak, 2007), further airborne emission reduction is desirable (Ščasný et al.2009). In reality, however, since the end of 1990’s the rate of emission reduction has slowed down significantly (EEA, 2014). The aim of our paper is therefore to identify sectors with the highest economic potential for reduction of sulphurous emissions in the Czech Republic, measured through the shadow price of SO2 across the industry sectors. We also aim to compare the implicit price of SO2 emissions with the magnitude of damage caused by these emissions and with the current level of market-based instruments which should internalise these external costs.In this paper, we specifically follow the Mekaroonreung & Johnson study (2012) and apply Convex Nonparametric Least Squares quadratic optimization to analyse technical efficiency jointly with emission shadow price estimation. Then we apply the impact pathway analysis embedded in the ExternE method (Preiss et al. 2008) to quantify the environmental external costs attributable to SO2 emissions. Lastly, the shadow prices (i.e. the marginal abatement costs) are compared with corresponding external costs to draw policy-relevant conclusions.Our results support our hypothesis that the sectors with low production of SO2 emission might have higher shadow prices of SO2 than the sectors with a high volume of SO2. On average, the highest shadow price of SO2 – above 5,000€ per ton of SO2 – is estimated for ‘Textiles’, ‘Manufacture of non-metallic mineral products’, and ‘Manufacture of medical products’, while the lowest time-average of SO2 shadow prices are estimated for ‘Electrical machinery’ (478€) and ‘Sewage and refuse disposal’, ‘Fabricated metals products’, ‘Renting of machinery’, ‘Manufacture of basic metals’, and ‘Coal mining’, ranging from 613€ to 737€. In the remaining sectors, the estimated shadow price of SO2 varies between 850€ and 2,450€ per ton of SO2. In the Electricity, gas & hot water sector – which releases the highest volume of SO2 emission – the average shadow price during the period 2000 to 2008 is 1,480€, and the shadow price decreases from 2,113€ to 803€ in 2007 and then it increases to 1,117€ in 2008. These results correspond to the previous estimates we obtained by using ODF method (Rečka & Ščasný, 2011); the median and weighted average of shadow price of SO2 for coal and lignite power plants in the Czech Republic were estimated at 1,074€ and 1,548€, respectively. The average, weighted by industry GVA, shadow price of SO2 decreases over time, especially from 2004, starting at 2,527€ per ton of SO2 in 2000 and reaching its minimum at 708€ in 2007. In 2008, there is an increase to 1,172 € per ton of SO2 on average. Our results are in line with the technology specific marginal abatement cost (MAC) as estimated for the Czech Republic by other approaches; for instance, the MACs of ton SO2 derived from the GAINS database on the costs and technical potential of current and prospected abatement technologies (Ščasný et al. 2008) are in the range of 430 to 4,000 €, and the implicit MACs derived from the computable general equilibrium GEM-E3 model (Pye et al. 2008) are between 545 and 785 € per ton of SO2. We also found that the SO2 shadow prices are in almost all sectors smaller than the magnitude of the external cost associated with SO2 emissions, that is 7,235€ per each ton. The only three exceptions, ‘Textil, Mineral products’ and ‘Manufacture of Medical instrument’ sectors, for which in some years we record a higher shadow price for SO2 than the corresponding external cost. However these two sectors release only a negligible amount of SO2 emissions with very limited potential to reduce them.