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 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.