Unveiling Pollution Abatement Costs in Chinese Manufacturing Sector Using a By‐Production Approach

ABSTRACT This paper introduces a novel method to estimate the marginal abatement cost of SO 2 in Chinese manufacturing using a by‐production (BP) approach. We simultaneously model desirable and undesirable outputs within a unified production system, providing insights into production technology and firm‐level efficiency in pollution abatement. To address endogeneity, we apply a two‐step dynamic panel approach, identifying the marginal abatement cost from the first‐order condition of profit maximization. Using firm‐level production and emissions data from 1998 to 2007 in China's chemical and non‐metallic mineral industries, we find that pollution treatment facilities effectively reduce SO 2 emissions. The average estimated marginal abatement cost is 6532 yuan per ton in the chemical industry and 5640 yuan per ton in the non‐metallic mineral industry.