Estimating Shadow Prices of Pollution in Selected OECD Countries

Now that pollution is reaching worrisome levels in some countries and at the global level, there is a growing consensus that it needs to be explicitly considered as a by-product of the production process and incorporated in economic decisions. But this is not easy in the absence of markets and observable prices. Shadow prices of pollution, the opportunity cost of abating pollution in the form of reduced output, have to be estimated using specific techniques and serve several purposes. It’s a signal firms have to take into consideration when they decide upon their investment decisions. Shadow prices can also inform policymakers when they set policies. They can be used to assess policy ex ante by comparing the marginal benefits of environment policies with the cost they involve for private firms. These prices can be seen as benchmark for allowance price in emission market-based schemes or can be useful in designing optimal environmental tax schemes. The indicator can also be used ex post and can be considered as a policy indicator of pollution regulation and compliance to these regulations. More generally such prices are used each time there is a need to value pollution...