On the Nexus of SO2 and CO2 emissions in China: the ancillary benefits of CO2 emission reductions

This paper examines the issue of ancillary benefits by linking sulfur dioxide (SO₂) emission to CO₂ emission using a panel of 29 Chinese provinces over the period 1995–2007. In the presence of non-stationarity and cointegrating properties of these two data series, this paper applies the panel cointegration techniques to examine both the long-run and short-run elasticities of SO₂ with respect to CO₂. The major findings are that: (1) there exhibits a stable long-run equilibrium relationship between the SO₂ and CO₂ emission with the long-run elasticity being 2.15; (2) there exists a short-run relationship between these two emissions with the short-run elasticity being 0.04. In addition, following an exogenous shock that causes a deviation from the long-run equilibrium, it would take approximately 15 years for SO₂ emission to revert toward the long-run equilibrium path with an average annual convergence rate of 6.5%; (3) the derived ancillary benefits that is generated from one metric ton of CO₂ emission reduction, are 11.77 Yuan (approximately US1.7) in the short run and 196.16 Yuan (US 1.7) in the short run and 196.16 Yuan (US 30) in the long run. These findings are not only crucial from the econometric modeling perspective, but also have important policy implications.