Technical efficiency, shadow price of carbon dioxide emissions, and substitutability for energy in the Chinese manufacturing industries

a r t i c l e i n f o JEL classification: C61 Q54 Keywords: Technical efficiency CO 2 shadow price Morishima substitution elasticity Chinese manufacturing industry China is the world's largest CO 2 producer and energy consumer. In this paper, we calculate the maximum technically obtainable CO 2 emissions reduction from the efficient use of inputs and estimate the shadow prices of CO 2 emissions in order to assess the potential cost savings deriving from trading emissions among industries by measuring the input distance function for 30 Chinese manufacturing industries. Our empirical results indicate that CO 2 emissions could be reduced by as much as 680 million tons in the aggregate. The shadow prices of CO 2 vary from a high of $18.82 to a low of zero across industries, with an average of $3.13 per ton. Additionally, the estimated indirect Morishima elasticities of substitution of capital for fossil fuels indicate that the substitutabilities of capital for oil, gas, and coal are higher than the substitutability for labor. China's reform and open policy has helped the country achieve remarkable progress in terms of economic growth and social development since 1979. Over the past three decades (from 1979 to 2009), China's GDP has increased by more than 80-fold, which has resulted in enormous increases in energy consumption, primarily as the result of heavy reliance on energy-intensive industries. Ten years ago, China's total energy consumption was just half that of the United States, but in 2010 China overtook the United States and became the world's largest energy user (China: 2.43 billion TOE; U.S.: 2.29 billion TOE), as is shown in Fig. 1. China's energy consumption is overwhelmingly dominated by fossil fuels, which generate large quantities of carbon dioxide (CO 2). Since China surpassed United States as the largest producer of CO 2 in 2007, China has become the greatest contributor to global warming (China: 8.33 billion tons; U.S.: 6.15 billion tons in 2010), as can be seen in Fig. 1. Scale-oriented economic development in China has resulted in problems such as resource depletion and environmental pollution. Globally, China is increasingly likely to be obligated to reduce greenhouse gas emissions under the forthcoming post-Kyoto Protocol. China has promoted efforts to improve its performance in terms of environmental protection and energy utilization since 2005. China's 11th Five-Year Economic Plan (2006–2010) clearly illustrates the importance of constructing an energy-efficient and environmentally friendly society. …