Directional shadow price estimation of CO2, SO2 and NOx in the United States coal power industry 1990-2010

- Separately estimating the shadow prices of pollutants may lead to an underestimate.
- A directional shadow price (DSP) model is developed for CO2, SO2 and NOx.
- An empirical study of the United States coal power plants 1990-2010 is conducted.
- The result is compared to previous studies in electric power sectors.
- The proposed DSP shows 1.1 times the maximal shadow prices cited in the literature.

Shadow prices, also termed marginal abatement costs, provide valuable guidelines to support environmental regulatory policies for CO2, SO2 and NOx, the key contributors to climate change. This paper complements the existing models and describes a directional marginal productivity (DMP) approach to estimate directional shadow prices (DSPs) which present substitutability among three emissions and are jointly estimated. We apply the method to a case study of CO2, SO2 and NOx produced by coal power plants operating between 1990 and 2010 in the United States. We find that DSP shows 1.1 times the maximal shadow prices estimated in the current literature. We conclude that estimating the shadow prices of each by-product separately may lead to an overestimation of the marginal productivity and an underestimation of the shadow prices.