Economic theory suggests that equalisation of the marginal cost
of abatement across firms would minimise the total cost of abating
pollutants at an aggregate level. In the present exercise the estimated
shadow prices of the pollutant CO2 vary across plants. The average
shadow price or the marginal abatement cost of CO2 for the coal fired
thermal plants in India for the period 1991-92 to 1999-2000 being Rs.
3,380.59 per ton of CO2 as per Model-1 and Rs. 2,401.99 per ton of CO2
as per Model-2. Considerable differences in the plant specific shadow
prices points towards inefficient use of abatement technology by the
thermal plants in India thereby building a case for using economic
instruments like pollution taxes or marketable pollution permits to
regulate/control pollution by the power plants instead of currently used
command and control instruments.
As regards the relationship between efficiency of the power
plants defined in terms of CO2 emissions per unit of electricity output
generated and marginal cost of abating CO2 is concerned, there exists a
direct correlation between the two. This implies that an efficient plant is
associated with a higher marginal cost of abating CO2 and an inefficient
plant with a lower marginal cost of abatement. In other words, it becomes
increasingly difficult for a plant which emits less CO2 per unit of its good
output to reduce one unit of its CO2 emissions vis-à-vis plants that are
less efficient and hence emit more CO2 per unit of good output. That is,
the marginal cost of abatement or the shadow price of the undesirable
output increases with the efficiency of the thermal plant.
25
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