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

The paper estimates the shadow prices of SO2 emissions for 36 Czech industry sectors during the period 2000-2008. A convex nonparametric least squares quadratic optimization formulated by Mekaroonreung & Johnson (2012) is applied to measure technical efficiency and to jointly estimate the shadow prices of SO2 emissions. The weighted average shadow price ranges between 360€ and 1,316€ per ton of SO2 and it declines over time. These values are in line with other estimates of SO2 shadow price and marginal abatement cost estimated for the Czech Republic. Since the estimated shadow prices of emissions can be interpreted as marginal abatement cost, the ExternE method is applied to compare them with the marginal environmental external costs that are attributable to SO2 emissions released by the industry sector. We conclude that current regulation is far from the economic optimum, since the estimated SO2 shadow prices are much lower than corresponding marginal damage costs: in some sectors the shadow prices are even one order of magnitude smaller than the external costs. Since current market-based instruments have internalised the external costs only partly, these instruments have been ineffective and economically sub-optimal.