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



Issues concerning greenhouse gas (GHG) emission and global
warming have received a great deal of attention in recent years. As per
the Kyoto Protocol signed in 1997, the industrialised countries, which
have historically been mostly responsible for increase in GHG
concentration, agreed to reduce the flow of their GHG emission by 5.2
percent below the level prevailing in 1990. While the developing
countries do not yet have any binding commitment, there is a realisation
that large developing countries such as China and India need to take
some action in this regard since they are among the large contributors to
incremental emissions. Such a course of action, however, would
adversely affect their economic growth prospects. Hence, if India were to
sign any agreement on GHG emissions reduction, it must know the costs
and benefits of such an agreement. In near future if India were to
participate in any international effort towards mitigating CO
2 emissions,
the power sector, which is one of the largest emitter of carbon dioxide in
the country, would be required to play a major role.

In this context the present study analyses the potential costs
imposed on the coal fired thermal power plants, one of the main sources
of CO
2 emissions in India, by the implementation of environmental
regulation. More specifically the study aims to estimate the marginal
abatement costs, which correspond to the costs incurred by the power
plants to reduce one unit of carbon dioxide from the current level. The
present exercise, therefore, seeks to derive the ‘shadow prices’ of
reducing carbon dioxide emissions generated by the thermal plants in
India. It, thus, attempts to provide an answer to the question: how much
does it cost the thermal plants in India to reduce CO
2 emission in terms
of foregone output or revenue? These estimates are expected to help in
formulating environmental policies. The marginal abatement costs thus
obtained would provide guidance on whether the current regulation on
pollution satisfies the cost-effectiveness criterion which is based on the
principle of marginal abatement costs be equal across individual power
plants (Baumol and Oates, 1988). It is being recognised by the
developed world that the marketable emission permit system is a more
efficient way of regulating pollution. The unit price of a marketable
emission permit would be equivalent to the derived marginal abatement
costs (Baumol and Oates, 1998; Titenberg 1985). Consequently, these
estimates of marginal cost of abatement could be used to predict the
price of emission permits to be introduced.



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