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

- We suggest a new concept and a model with a mapping rule for estimating shadow price.
- We apply a mapping rule that incorporates the abatement level of undesirable outputs.
- The shadow price of CO2 in South Korean power plants is empirically estimated.
- The model generates continuously changing estimates, i.e., a shadow price curve.
- The determinant factors of the shadow price are investigated in second-step regression.

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.