A new approach to measuring shadow price: Reconciling engineering and economic perspectives

a r t i c l e i n f o Shadow price is one of the most important pieces of information in environmental decision making. Two different approaches—namely, economic and engineering—have been applied to obtain the shadow price of undesirable outputs, while using different methodological backgrounds and perspectives. The current study proposes a new conceptual framework and an economic estimation model to reconcile the shadow price estimates derived via the two approaches. We also suggest a new mapping rule that incorporates the concept of abatement level, which is a basic element in the engineering approach. As a result, the proposed model generates continuously changing estimates—i.e., comprising a shadow price curve—based on the abatement level. We further investigate the determinant factors of shadow price by using second-step regression. The suggested methodology is used to investigate the shadow price of carbon emissions in South Korean electricity generating plants, thus yielding relevant policy implications. Both the importance and awareness of carbon abatement has continuously increased, despite prevalent arguments about the prospects of international efforts to mitigate climate change, most of which arise from political and economic interests. Various eco-friendly policies and guidelines have been developed by governments, with the aim of reducing carbon emissions. Typical examples of such policies in the electric power industry include the regulation of the increased use of green energies (e.g., Renewable Portfolio Standards), the activation of carbon trading markets, and the development of clean and intelligent technologies (e.g., Smart Grid). The pressure to apply carbon abatements has expanded from the national or industrial-sector level to the level of individual companies and buildings, in order to fulfill government objectives or self-imposed goals. In particular, enhancements in eco-efficiency are thought to constitute one of the key factors behind the existence and sustainable development of enterprises in the changing business environment. New decisions that consider low carbon emissions are required, if a company is to enhance its competitiveness in the market and acquire new business opportunities when managers set product portfolios and business strategies. Companies in energy-intensive industries would be confronted with a severe business environment, if they were to have problems coping with carbon-related issues, in the absence of appropriate decision making and preemptive responses. As Coelli et al. (2007) and Murty and Kumar (2002) argue, the options for carbon abatements among production units can be categorized into several different fields, including those that address the development and adoption …