Estimation of marginal abatement costs for undesirable outputs in India's power generation sector: An output distance function approach.

V. Results

Having estimated the parameters of the distance function, we
now substitute their values in equation (xvi) to get the estimated output
distance function. Substituting the estimated output distance function in
equation (xv) and simplifying we get the marginal cost of abating CO2
emissions expressed in terms of the electricity output foregone.

The results of the study indicate that out of a total 76
observations in Model-1, 15 observations are located on the frontier of
the output set as the value of the output distance function for these
observations is one. The remaining 61 observations, for which the value
of the output distance function is less than one, lie inside the output set.
Similarly, in Model-2, we find that 17 observations lie on the frontier of
the output set and have value of the distance function as unity and 59
observations lie inside the output set as their output distance function
have value less than one. On an average the mean value of the output
distance function for the sample of thermal plants in Model-1 is 0.9669
with standard deviation 0.0356. This means that electricity generation
can be increased by 3.31 percent (with CO2 emissions increasing in the
same proportion) on an average by the thermal plants if they produce
efficiently i.e. if they operate on the frontier of the output set. On the
other hand, for Model-2, the mean value of the distance function is
0.9722 with a standard deviation of 0.0275 implying that the electricity
generation can be increased by 2.78 percent if the plants operate
efficiently. But such increase in output will be accompanied by a
proportionate increase in the emission of the pollutants. The mean value
of the shadow price or the marginal cost of abatement of CO2 for the
power plants in the study is Rs. 3,380.59 per tonne in case of Model-1,
and Rs. 2,401.99 per tonne in case of Model-2. These shadow prices
reflect the trade-off between the desirable and undesirable outputs at the
actual mix of outputs. This means that if the plants were to reduce the
emission of CO2 by one tonne, they will have to forego electricity output
worth Rs. 3,380.59 in Model-1, and Rs. 2,401.99 in Model-2. It should be
noted here that the shadow prices or the marginal abatement costs of

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