How energy transition promotes pollution abatement in China’s industrial sector

Without a market for pollution permits, such byproducts as carbon dioxide bear no market price, resulting in a higher environmental degradation than the socially optimal level. The contribution of this paper lies in that we model production process by resorting to a relatively novel by-production approach resembles a multi-stage process and ensure that the economic and environmental sub-technologies are properly linked. The by-production Data Envelopment Analysis model is adjusted so that positive shadow prices are obtained. Then, we derive the shadow prices of carbon dioxide emission, which can be interpreted as its marginal abatement costs, for province-level industrial sector data in China for the period 1997–2019. We demonstrate that the shadow price of carbon has increased between 1997 and 2019, suggesting the policymakers’ efforts to curb carbon dioxide emission levels in manufacturing have borne fruit. We observe a significant variation in shadow prices across the different provinces and attempt to explain it using exogenous factors such as carbon productivity, non-fossil energy consumption, and urbanization rate. The findings reveal that improving energy efficiency and carbon productivity, fully taking into account the emission reduction potential and cost differences of areas, and transitioning to non-fossil energy will be helpful for China to reduce the carbon emissions of the manufacturing industry in the future.