The estimation of the value of carbon emissions has become a major research and policy topic since the
establishment of the Kyoto Protocol. The shadow price of CO2 provides information about the marginal
abatement cost of this pollutant. It is an essential element in guiding environmental policy issues, since
the CO2 shadow price can be used when fixing carbon tax rates, in environmental cost-benefit analysis
and in ascertaining an initial market price for a trading system. The water industry could play an important role in the reduction of greenhouse gas (GHG) emissions. This paper estimates the shadow price of
CO2 for a sample of wastewater treatment plants (WWTPs), using a parametric quadratic directional distance function. Following this, in a sensitivity analysis, the paper evaluates the impact of different settings of directional vectors on the shadow prices. Applying the Mann–Whitney and Kruskal–Wallis
non-parametric tests, factors affecting CO2 prices are investigated. The variation of CO2 shadow prices
across the WWTPs evaluated argues in favour of a market-based approach to CO2 mitigation as opposed
to command-and-control regulation. The paper argues that the estimation of the shadow price of CO2 for
non-power enterprises can provide incentives for reducing GHG emissions.
