Technical efficiency, shadow price of carbon dioxide emissions, and substitutability for energy in the Chinese manufacturing industries

China is the world's largest CO2 producer and energy consumer. In this paper, we calculate the maximum technically obtainable CO2 emissions reduction from the efficient use of inputs and estimate the shadow prices of CO2 emissions in order to assess the potential cost savings deriving from trading emissions among industries by measuring the input distance function for 30 Chinese manufacturing industries. Our empirical results indicate that CO2 emissions could be reduced by as much as 680million tons in the aggregate. The shadow prices of CO2 vary from a high of $18.82 to a low of zero across industries, with an average of $3.13 per ton. Additionally, the estimated indirect Morishima elasticities of substitution of capital for fossil fuels indicate that the substitutabilities of capital for oil, gas, and coal are higher than the substitutability for labor.