Environmental efficiency, irreversibility and the shadow price of emissions

Abstract

Assessing the production of goods and services while minimizing the damage to the environment is a key component to advance sustainable development at national and global levels. The nonparametric estimation of lower and upper bounds on shadow prices of pollutants is undertaken to support the design of policies promoting environmental efficiency in the presence of asymmetry in adjusting productive and abatement capital capacity. This framework is applied to the pulp and paper sector of 39 countries for 1996-2009, and finds that the USA, China and Ireland are the most environmentally inefficient countries in the pulp and paper sector. The adjustment costs associated with net investment and disinvestment are found to be asymmetric. For those nations where the shadow price of CO2 is lower than the carbon tax, there is still an opportunity to abate emissions further. Results on complementarity or substitutability between pollutants are in general inconclusive.